Mergers and acquisitions have made big news in the enterprise applications space – especially with Oracle Corp. snapping up 20 companies in the space of two years.

But with all the hoopla about who’s acquiring whom, a reverse trend has largely gone unnoticed: spinouts – the phenomenon of larger software vendors selling off non-core businesses.

The latest example of this is security cum information management software vendor Symantec Corp. that earlier this month announced it was exiting the Application Performance Management (APM) space.

Cupertino, Calif.-based Symantec announced it would be selling its APM business to Vector Capital, a San Francisco-based private equity firm specializing in spinouts, buyouts, and “recapitalization” of existing tech businesses.

When the sale closes, the APM business will operate as a standalone company called Precise Software Solutions (its name before it was acquired by Veritas, which, in turn, was acquired by Symantec).

What’s the stimulus behind spinouts?

One oft mentioned driver is: “to gain better efficiencies in business.” And that’s not very different from what motivates mergers.

With mergers, however, efficiencies are sought to be gained through a broader and more diverse product portfolio.

Companies selling off non-core businesses, on the other hand, say they become more efficient by developing “focus.”

For instance, Symantec’s areas of focus are security, storage, server management and compliance, notes Henri Isenberg, vice-president of the company’s Storage and Server Group.

Application performance, he said, doesn’t fit well with these core categories. “So it made a lot more sense to find a better home for the APM business.”

That home is Vector Capital, a private equity firm with a strong track record of “flipping” businesses or divisions of businesses, including Corel and Intel’s LANDesk.

In this case, the APM business will operate as a standalone company and go back to its roots as Precise, which was an Israeli-based high-tech company.

“The first thing we did was get on a plane,” said Robert Amen, principal with Vector Capital, who spoke to ITbusiness.ca on his way back from a business trip to Israel.

“We specialize in spinning out these non-core assets of large technology companies,” he said.

“What we look for is good technology, a good team and good markets, and Symantec’s APM division had all of these characteristics – it just wasn’t core to Symantec.”

Amen noted that Symantec – through its purchase of Veritas – also inherited Precise, which Veritas had bought in 2003.

In such a scenario, he said, integration with the previously acquired company is usually not the first priority.

This meant that under Symantec, the APM business wasn’t growing as fast as the core market.

In this challenge, Vector Capital saw an opportunity.

Analysts such as Gartner Inc. suggest the move is a smart one.

The spinoff “will likely extend the viability of this technology, and current Symantec APM customers should consider the sale a positive development,” say Gartner analyts Milind Govekar and Dave Russell in a recent brief.

 While that may be the case, not all customers may be comfortable with being shifted to another vendor.

To accommodate those who don’t Vector Capital, has a multi-year reseller agreement with Symantec, so customers can continue to purchase product from Symantec if they choose.

The deal was structured in such a way that customers will be insulated from the transition, said Isenberg. They can continue to call Symantec for support and Symantec will handle call transfers behind the scenes.

He said the same support agreements that exist today will continue to be honoured for the length of the contract.

“The main message here is that it’s business as usual.”   

“The way it’s designed is to minimize interruptions and most importantly protect the investment they’ve made with Symantec and APM.”

Vector Capital will likely open headquarters in the San Francisco Bay area, and then transition from Symantec’s infrastructure to its own – with plans to double sales and marketing over the next two years.

It’s currently looking for account managers, service professionals and developers in Israel. “This is a growth investment,” said Amen. “We’re hiring to grow.”

Spinouts have all the growth of startups, he said, but a different risk profile for investors. The fact that Precise has proven technology and more than 2,000 customers takes away the risk factor in the transaction, he said.

Vector Capital spent four years building up LANDesk, a business it purchased from Intel, before selling it.

And it spent seven years building up Savi Technology. With this much time and effort, he said, Vector Capital is looking to grow revenue three to four times, and in this case it believes the APM market has huge growth potential at 20 to 30 per cent.

Amen says Precise will have an edge as a nimble standalone company against competitors like Wily Technology and Mercury Interactive, which have recently merged with larger companies.

When any kind of a private equity firm takes over a business or division of a business, it means there’s some heavy lifting to be done to get to the stage where it’s flourishing.

“I think it stands to reason that it didn’t fit with Veritas’ storage and server portfolio,” said Kevin Restivo, senior research analyst with IDC Canada.

A private equity firm will do this heavy lifting, however, because it sees the potential for a more efficient organization. It’s buying the core assets it holds, namely customers or the product set. “But the business operations around that product set may not be up to par,” he said.

“That’s oftentimes where a private equity firm, or a larger software company trying to complement its current offerings comes in.”

Restivo said private equity firms bring efficiencies to an organization and are able to flip them to another company, and the end game is to get a return on equity. “The game is to make that company look lean and mean so the private equity firm can make a nice margin on the sale.”   

But they want to continue supporting customers so they don’t flee to a competitor’s product. Sometimes, however, research and development efforts end up on the chopping block.

“Given the current U.S. economic situation and the overall global economy, one has to wonder if there aren’t more mergers and acquisitions coming,” said Restivo.

Spinouts may be on the downturn, though, given the ongoing credit crunch.

But, he added, Vector Capital is well established and well funded, and there are still a lot of software companies out there that may be under-performing.

And this could provide more opportunities for private equity firms like Vector Capital that are well known and have more readily available cash and credit than firms of lesser reputation.

The transaction is expected to close by the end of this quarter.

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