Musing about SirsiDynix's new investment partner

Posted on Sat 23 December 2006 in misc

Sirsi Corporation merged with Dynix Corporation in June 2005. Now SirsiDynix has announced that Vista Equity Partners is investing in their company.

Let's take a look at Vista's investment philosophy:

*We invest in companies that uniquely leverage technology to deliver best-of-class products or services.*

I wonder if Vista confused "most market share" with "best-of-class" in their analysis. Given SirsiDynix's two flagship library systems, Unicorn and Horizon, it seems unlikely that they're talking about Unicorn here. True, you could say that Unicorn has "leveraged" decades-old proprietary technology, but it is Horizon that seems to be getting the real facelift these days based on modern technologies like Lucene.

Our investment philosophy is to enable good businesses to achieve their full potential. This starts by selecting well positioned companies with attractive market dynamics, aligning the interests of management with those of shareholders, and reducing unnecessary distractions.

Hmm - "enable good businesses to achieve their full potential". Well, at least Vista recognizes that SirsiDynix could be doing better. But wait: "attractive market dynamics" suggests that Vista sees SirsiDynix as holding the most market share in a relatively small market with institutions that are seen as having deep pockets (gee, look at all the books those libraries buy and electronic resources to which they subscribe--they can afford a 10% hike in support fees per year!) and a reluctance to face the pain of migrating to a different software platform. In short, SirsiDynix's customers are ripe for the picking. And, quite possibly, Vista sees opportunity to acquire a few more customers from shakier library products like Voyager. At least, those customers who have not already decided to join forces with an open-source solution like Evergreen.

"Aligning the interests of management with those of shareholders" suggests that SirsiDynix management hasn't been doing a good job to date of delivering profit and growth to their shareholders. Well, you can increase profit by offering a leading product that enables you to grow your market share -- or you can crank up the margin on your existing products by increasing prices and cutting overhead... overhead like customer service people, or developers. Now, it seems that SirsiDynix isn't a publicly traded company, so it doesn't really have shareholders at the moment. I can't imagine that Vista would be trying to prep SirsiDynix for an IPO -- there just isn't enough potential for growth to justify shareholder interest in this company -- so I'm going with "plump up the profit margin in preparation for a takeover". I'm basing this largely on the last bullet in the last category of Vista's investment philosophy (from Who we fund):

While our portfolio companies need not fit a specific profile, many of our prospective investments have some common characteristics including:

  • Technology provider or technology-enabled business
  • Recurring revenue business model
  • Mission critical, "sticky" solutions
  • Experienced management team
  • Favorable customer characteristics
  • Defensible competitive position
  • Favorable market dynamics
  • Strong value proposition
  • Potential for high margins

The most pertinent characteristics here are probably "recurring revenue business model" (the revenue from annual support fees are certainly attractive), "favorable customer characteristics" (due to our service focus, most libraries are pretty conservative about foisting a new search interface on our users and therefore unwilling to turn to a different product simply because the fees our vendor charges will increase), and "potential for high margins" (read: charge what the market will bear, just short of extortion).

You heard it here first: expect lots of news from SirsiDynix in 2007. I'm predicting more service fees (100% confidence), increased annual support fees (100% confidence), and the beginning of the end of Unicorn with an announcement that Horizon is the strategic product for new development efforts going forward (75% confidence). I'll go out on a limb and say that a merger or acquisition of SirsiDynix in 2007 is unlikely (33% confidence), but after proving their new business strategy and the nice spikes on their revenue and profit charts, I'll say that it's quite likely in 2008 (80% confidence).

Now, if I had the deep pockets of an equity firm, I would be investing in the Evergreen team; there's a core organization with low overhead (4 developers!), a proven product, and amazing potential for growth in the library market. But alas, I'll just have to cheer them on from the sidelines :-)