In the wake of the $11.3 billion leveraged buyout of SunGard Data Systems announced last week by Silver Lake Partners, the Blackstone Group, Texas Pacific Group, Bain Capital, Kohlberg Kravis Roberts & Co., Goldman Sachs Capital Partners and Providence Equity Partners, the industry has been trying to adjust its expectations for deals of the future--will there be more of the same, or was this a one of a kind, one-hit wonder that is unlikely to be seen again any time soon? Speaking with Securities Industry News' John Sandman the day after the announcement, SunGard CEO Cristobal Conde professed himself surprised by many aspects of the deal--pleasantly surprised.
The transaction was unprecedented both in terms of the size and the type of buyers that were involved. Can the industry expect more of the same with similar consortiums acting as the suitor, or is this an anomaly?
I think you'd probably get a better answer by asking the consortium. We didn't set out to break records by having the biggest LBO or the biggest equity deal ever. In fact we were moving happily along last year with our plans to spin off SunGard Availability when Silver Lake called Credit Suisse First Boston, our advisers. CSFB contacted our board and the board instructed us to meet with Silver Lake Partners. At that point we began to realize that this would actually be a very good thing for our customers.
And compared to talking to sell-side analysts and institutional investors, it's been really refreshing to talk to people who have a huge appetite for detail and very long-term horizons. If you look at the other Silver Lake companies, the average holding period for the firms they invest in is around four to seven years. Four to seven years is the typical commitment that our customers make to SunGard's products. It's refreshing to be with investors that have the same time frame that our employees and investors have.
Did you know about the investors' time frame going into this or did you find out after negotiations began?
I knew very little about private equity before this transaction began. We got this call out of the blue and, after it went to our board, I began to learn about it as part of this process. I asked a friend who was an investment banker in the private equity arena about what he thought of this, and he couldn't come up with another transaction of this type that was anywhere near this size. At the time, I was sure this was an example of his inexperience.
Do you think this is a vote of confidence in the tech sector? Or was this deal made at the top of the market, to avoid risking pullback in terms of the valuation for firms like SunGard?
I think what this deal tells you is that technology--at least some aspects of that market--is not as volatile as people think, for example, as having boom-and-bust cycles. But if it's a reaffirmation of anything, it's an affirmation of our business model and the hard work our employees have done. It's through their efforts that our company went from being rather small, valued in the tens of millions some 20 years ago, to being worth $11.3 billion now.
So are you optimistic about the sales prospects in the future?
We've seen for some time now more deals in the pipeline and we've seen larger deals. We also find that more firms are making more strategic commitments to fewer vendors. And we believe our competitiveness has been better than ever, and that gives us great comfort. I mean, $36 is a good price for the shareholders, but management is coinvesting with the investors. So management is putting money in at $36. When you're a public company, you're always making trade-offs between the short term and the long term. When you're a private company, you still need to make the trade-offs, but you can place greater emphasis on the long term. And that's why the new management is investing a large amount of money into the new venture.
From the standpoint of your investors, did the news about the sale of SunGard Availability Services drive this forward and do you still intend to spin it off?
No, we do not intend to implement those plans. There would be really adverse tax consequences to selling it or spinning off Availability immediately afterward. The [U.S.] tax code specifies that you generally have to wait five years in order to prevent something like this from becoming a taxable event. The amount of tax would be based on the original price for SunGard Availability that was paid at the time it was purchased, some 20 or so years ago. So the tax would be punitive. If we were to do a spin-off of Availability, we would have done it before this transaction, not after. So there is no breakup strategy concerning Availability.
Once you get free of the tax issues, can you anticipate a time when breaking up SunGard would make sense?
The tax code says five years. In the case of something that's five years out, you wouldn't plan for that now.
What can SunGard's customers in the securities industry, particularly on the buy side, expect from their relationship with the firm and the kinds of products SunGard will develop going forward?
Our biggest clients are very large commercial and investment banks with significant buy-side operations. All of them knew about this deal in advance because they are part of the lending and bond groups and participated in due diligence. They've been very positive about this transaction.
Since Monday morning, when it was announced, I've talked to clients that did not know about it, and once they realized that the tax code prevents you from quickly breaking up the company or otherwise making a quick buck on the deal, then they realized that this is really a buy-and-hold strategy with an investor group and lending covenants that give us enough headroom to continue and accelerate an investment program and to continue a mergers-and-acquisition program. So the investors have bought into our strategy. They just want us to get on with it faster and do it better. That's why senior management is investing a good chunk of their net worth into this.
Which segments of the industry might be stronger than others regarding the tech-spending outlook?
I don't think there's any sector we own that we don't like. They all have their cycles--some are mini cycles, some are larger cycles. That's neither here nor there. We've shown that we're long-term investors and have long-term planning horizons. And now it's refreshing to have investors whose horizons are like our clients'.
Are you getting any bad reactions to this deal from customers?
I've yet to have a bad phone call with a client.
