Class of 2020 | taizhang@wharton.upenn.edu
The burgeoning market for enterprise-level software has led to interest from major private equity firms seeking to capitalize on this growth. Of the many investment vehicles that could be used to tap into this accelerated value, one company, Infor, has been a target for firms such as the Blackstone Group (NYSE: BX) and Golden Gate Capital. However, on November 20th, 2016, Koch Equity Development made an unexpected move when they announced the buyout of an undisclosed stake in Infor for an estimated $2.5 billion dollars. This marks a severe dilution of Blackstone’s stake in the company and grants Koch Equity Development four seats on the board. The deal also marks Koch Equity Development’s first foray into the software business, and could be the beginning of a divestment from traditional commodity investments and the initiation of a long-term strategy in the technology sector.
Infor is a private, multinational company that produces and markets software designed to help businesses. Their unique scale and aggressive expansion strategy, marked by numerous mergers and acquisitions, has made them the top player in the enterprise software market. Analysts believe that buying a stake in Infor will allow Koch Industries to enter the digital marketplace quickly and rapidly, modernizing Koch’s traditional businesses in industrials and natural resources. At the same time, the deal can be beneficial to Infor as they gain access to Koch Equity Development’s vast financing and lines of credit, giving them a competitive edge in product development. The financial injection also allows Infor to eye publicly traded enterprise software companies, especially the two giants in the space, Oracle (NYSE: ORCL) and SAP SE (NYSE: SAP). The investment from Koch Equity Development can help Infor continue to expand their offerings in the cloud computing space in a way that’s directly competitive with the publicly traded, highly diversified software conglomerates.
Koch Equity Development’s interest in the enterprise software business stems from a classic and time-tried investment principle: buy what you know. Many of Koch Industries’ offshoot businesses, such as Georgia Pacific and Molex, have used Infor software for years to manage inventory and logistics. Koch Industries’ trust in Infor and confidence in their product differentiation were key factors that, according to insiders, led to the deal. Infor’s operations are also easily scalable due to their existing dominance in the private software company market. With financial backing from Koch Equity Development, key Infor executives are confident that they can continue consolidation and expansion in their market. Valuing Infor at nearly $10 billion, the deal has buoyed investor confidence in Infor and has accordingly led to renewed interest from firms that no longer have active stakes.
A $2.5 billion stake also creates an interesting situation for the leadership of Infor, and could shape decision-making processes moving forward. As previously mentioned, a $2.5 billion stake means that Koch Equity Development controls four seats on the board, but Blackstone, Golden Gate, and Summit jointly own another four seats. Finally, the CEO of Infor, Mr. Charles Phillip, has one seat on the board. This means that in the case of a conflict of interest between Koch Industries and other institutional private equity firms, Mr. Charles Phillip ultimately has the tiebreaker vote when making decisions. The lack of a clear supermajority in the company’s boardcan be a pressing issue in the future, especially when conflict of interest inevitably arises, but the fact that Infor’s executive management maintains control is healthy for Infor’s prospects.
The deal is currently in the negotiation stage and Koch Equity Development expects a closure in early 2017. The announcement has buoyed interest in Koch Industries and analyst consensus appears to be positive. However, investors should be wary about Infor’s split board and be aware of the risks associated with challenging highly established, well-funded and publicly traded competitors. Taking these risks into account, it will be interesting to see how the sector reacts to this major power move by a company attempting to bring itself at the forefront of the digital era.