Francisco Partners Analysis Essay

Posted on by Dill

Originally published in The Financial Times

Most investors in tech companies lose vast sums reacting to short-term jitters, writes Michael Moritz.

The San Francisco-based buyout firm Francisco Partners recently published a delicious analysis relevant to anyone wondering about what the future holds for technology stocks. It is a bulletin in which both pessimists and optimists can find hope and it offers a helpful perspective for those wondering about the current valuations of technology companies.

First, the bad news. The 15 technology companies with the largest market capitalisations in 2000 have been decimated — losing about $1.35tn, or roughly 60 per cent, of their combined market value.

Only one, Microsoft, has a market capitalisation that is higher than in 2000. One extraordinary aspect of this meltdown is that it did not occur, as some might suspect, in the much ballyhooed dotcom wonder companies of yesteryear. Instead it was a blight that affected most of what were once considered blue-chip technology holdings.

In 2000, Nortel sported a market value of $209bn that, like those of its classmates, had been bloated by the enthusiasm of the era; it has since gone bankrupt. While other members of this corporate bracket have avoided that ignominy, their long-term stock charts present bleak pictures. Cisco’s market value has faded from $403bn to $144bn; Intel’s from $288bn to $161bn; and EMC’s from $218bn to $51bn.

For the class of 2000, the sharpest property price declines have been in the deteriorating neighbourhoods of systems, hardware and semiconductors. This is because of the continuing decline in the cost of computing, the rise of open-source software, the move to the “cloud” and the emergence of huge datacentres where companies such as Amazon, Google and Facebook are designing their own approaches.

Now a word from sunnier climes. Fifteen companies that were together worth less than $10bn in 2000 are now among the world’s 50 top technology companies as measured by market capitalisation, with a combined worth of $2.1tn. (Had Amazon been included, rather than being classified as a retailer, this number would have swollen by another $250bn). Apple, which even in 2000 was viewed as little more than a curiosity, has risen in value from $6bn to $659bn. A few themes jump out of this listing: the power of novelty, the shift towards China, the benefits of patience and the virtues of capital efficiency.

Several of today’s most valuable technology companies did not even exist in 2000. Facebook, LinkedIn and Twitter together have a collective corporate history of only 33 years. Even Google and Salesforce were barely smudges on the horizon in 2000. These companies now have a combined value of about $850bn. Beyond some of the customised systems they operate in their own datacentres, and in Google’s case, some sideline activities such as its Nexus phones and Chrome notebooks, none of these companies sully their hands with anything as taxing as hardware. They have thrived from the artful deployment of software, in particular the “cloud based” variant, and — for Facebook, LinkedIn, Twitter (and Google’s YouTube service) — organising and collating the contributions of their users.

Perched in a clump as the fourth, fifth and sixth most valuable technology companies of the day are Alibaba, Tencent and Baidu. This threesome is now worth $409bn — testament not just to how much China has progressed in a decade and a half but a harbinger of the next several decades as the country places increasing emphasis on spawning its own technology.

Woe betide the management of any western technology company that underestimates the challenge posed by the vast number of emerging Chinese competitors, fuelled by an ambition and work regimen that is hard to match in Europe and the US.

Finally, a note about two other themes that jump out of this listing: patience and profits.

Most investors in technology companies squander vast sums by reacting to short-term jitters or global jolts rather than concentrating on the staying power of those emerging enterprises on the right side of history.

And for the founders and chief executives of all of the current billion-dollar “unicorns” there is another abiding message. Almost all of today’s technology juggernauts formed before about 2008 required smallish amounts of capital. Google, for example, consumed only $8m before turning profitable. Maybe this means that sooner or later a new class of company will come into vogue — a rare species known as the profitable unicorn.

The writer is chairman of Sequoia Capital and co-author with Sir Alex Ferguson of ‘Leading’. Views expressed are his own. Sequoia Capital persons hold interests in certain companies mentioned.

Israeli workforce management technology firm ClickSoftware is being acquired by California-based investment firm Francisco Partners Management. The all-cash transaction is valued at approximately $438 million.

Currently a NASDAQ publicly-traded firm, ClickSoftware will see its stockholders sell their holdings to Francisco Partners, with each outstanding share to be sold for $12.65 – 45% over the stock’s average closing over the previous 90 days. The deal must still be approved by stockholders, but ClickSoftware’s Board of Directors unanimously approved the sale in a recent meeting. Francisco Partners, which focuses strictly on technology investments, aims to buy all outstanding shares of the company, turning it into a private firm, and ClickSoftware will recommend that all shareholders sell.

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With over 700 employees, the Petah Tikvah-based firm is the world’s largest service management company, with its software helping hundreds of utilities, police and fire departments, and emergency rescue organizations to help them prioritize work orders, repairs, and emergency responses, ClickSoftware CEO Moshe Ben-Bassat told The Times of Israel in an interview.

ClickSoftware’s system is especially useful in emergencies, said Ben-Bassat – like the snow emergencies that became a routine event in many US cities last winter. When such events take place, utilities, emergency services, police, fire, food delivery personnel, and many others need to be ready operate in crisis mode, said Ben-Bassat.

A “crisis” is not a big, amorphous thing; it’s made up of a lot of small crises that can quickly get out of control, he said. For a utility, “out of control” means getting behind on providing the basic repairs and service to ensure that clients get back services as quickly as possible. That means ensuring that the right personnel are available and on call, and even more important, can quickly get where they have to go.

Planning this is not a job for a human being, said Ben-Bassat. “If you ask managers how they would deal with this kind of scenario in theory they would come up with a plausible scenario, but once the emergency hits, they cannot deal with the events and issues that are thrown at them,” said Ben-Bassat. When inundated with information, the brain tends to filter out the overload – but in an emergency where lives, often thousands, are on the line, that’s not good enough.

Which is where ClickSoftware comes in. “We sit with managers and personnel in advance of emergencies and try to get a sense of what their priorities are,” said Ben-Bassat – such as in the case of a power company, which would want to restore power to a hospital first, then to substations serving thousands of residents, to specific neighborhoods, and only later to individual homes where repairs are still needed. All that information is programmed into ClickSoftware’s system, which uses artificial intelligence to evaluate incidents that flood a call center during an emergency, placing them in an action queue in the order of the utility’s policy priorities.

The system prioritizes service calls by levels of importance, in a triage system that sees the most important problems given priority. The system is based on big data algorithms that evaluate the service call, taking into account environmental and other factors, and weighing the importance of the call compared to others that are pending.

Ben-Bassat stressed that the computer is not the one making the decisions. “It’s true that the system is doing the ‘triage,’ based on need, but it is based on the parameters decided upon by the decision-makers for the organization,” he said. “There is no ‘independent thinking’ in this artificial intelligence system, just an execution of the orders the system was given when emergency scenarios were laid out,” with the priorities programmed into the system by managers. If any “moral judgments” are being made about what a priority is or isn’t, he added, it wasn’t ClickSoftware making them.

ClickSoftware isn’t used by just utilities, but by companies in a plethora of industries, including airlines, railroads, governments, hospitals, retail businesses, and many others. The company provides tools for all aspects of personnel and scheduling management, including enabling companies to set appointments for service personnel with customers, and helping managers to get out in the field by providing a full suite of apps for tablets and smartphones.

ClickSoftware, said Matt Spetzler, partner at Francisco Partners, is the best at what it does, and his firm “looks forward to combining our expertise with its talented team of professionals to further enhance its cloud solutions, grow its customer pipeline and further advance its strategic goals.”

“After a comprehensive evaluation and review of strategic alternatives designed to enhance shareholder value, we are confident this agreement represents a favorable outcome for our shareholders, providing them with immediate, substantial cash value,” said Ben-Bassat. “We are excited to partner with Francisco Partners, a firm with an established track record of working with companies transitioning to cloud and with companies in relevant verticals to ClickSoftware. The added flexibility we will have as a private company, combined with the benefit of Francisco Partners’ knowledge and domain expertise, will allow us to more effectively focus on our long-term investment and growth objectives, which will benefit our employees, customers and partners.”

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