Elliot Management announced yesterday that its wholly owned Private Equity Subsidiary, Evergreen Coast Capital Partners, announced a deal to acquire Gigamon. Gigamon is a market leading provider of what it calls traffic visibility solutions and what many refer to as network packet brokers.
Gigamon has always delivered premium solutions and extracted premium pricing--the most often-quoted competitive phrase in the space is that we are <insert percentage--33-50% or more> less than Gigamon. Yet Gigamon has continued to deliver innovative solutions and grow in the enterprise and service provider markets. Recently its focus on enabling security solutions has resulted in significant growth. The company was able to successfully transition from a VC-backed private company to a public company. While this transition was not without its challenges along the way – it is difficult to keep up a 30-40% growth rate indefinitely - the leadership team has worked diligently to keep the company on track. It is now entering a new phase by returning to private ownership under a Private Equity firm. So, what does that mean?
Having spent the last three years working for a company owned by a private equity firm, I have an idea of what is in store for Gigamon. While every PE company will have different objectives, here is what I believe we will see.
PE firms invest because they see an opportunity to make money (duh!) but how they do it can differ. In some cases, it may be pure market consolidation (rolling up companies), adding a strategic asset to an existing platform company (for example Dell Software), or acquiring a strategic platform company. As far as I can tell from the limited information provided, it appears that Gigamon is going to be one of their strategic platform companies. This means:
- Gigamon will actively look to acquire companies: Evergreen Coast Capital brings with it a war chest for Gigamon to leverage to acquire new companies to expand its value to its customer base. Target companies could include upstream management vendors that currently leverage traffic visibility solutions for network, security, or cloud management vendors. It may also include vendors with innovative virtualization technology for collecting east-west traffic in cloud or NFV environments.
- The management team will likely stay in place, as PE companies typically invest in the management team that has successfully run the company and achieved its current level of success. While the pressure of quarterly earnings may fade, this may be replaced by monthly board meetings (at least initially) with a focus on operational efficiencies.
- There could be a shift from overall growth to profitable growth. This means looking at EBITDA growth. It could manifest itself in exploring additional opportunities to increase margins by selling more software-only solutions (enabling customers to purchase their own hardware). Unfortunately, often this shift requires a workforce reduction in order to run leaner and more efficiently.
Ultimately, we need to see what kind of playbook Evergreen Coast Capital has in store for Gigamon. Being relatively new to the PE space, we need some time to see how the Evergreen companies are managed and what their time horizon is to see a profitable exit. Again, this can vary, but many are in the 3-5 year timeframe. I look forward to following Gigamon as it progresses through its next chapter and how it leverages this opportunity to deliver additional value to its customers and new shareholders.