Private Equity on Steroids (Part 2)

How Serena went about translating a strong and steady cash flow into accelerated revenue growth with the risk of a new SaaS business model

To seize the market opportunity and transform itself into a more meaningful, vibrant and relevant company, Serena had to do it outside of the public market and go private. They teamed with a private investor who had deep knowledge of the IT and high tech industry: Dave Roux at Silver Lake. Silver Lake was willing to make the bet of letting Serena’s management transform its business while continuing to extract the value of the profitability. Silver Lake acquired Serena for $1.1 billion.

Serena built a SaaS offering based on a methodology called Agile Software Development. If something goes wrong in the “waterfall”, customers have a classic model to rely on. If the customer tests something and it is totally wrong, s/he can work his/her way up the waterfall. With this development environment, developers and business managers move in very quick cycles from requirements to design to build, to test to release.

70% of companies these days are trying Agile Software Development in some form, up from 15% a couple of years ago.

Today, IT is focused on a few applications that are highly complex. There is a whole long tail of important business projects that IT backlogs and ignores. Many of business intelligence and analytics projects fall into this ignored long tail. The mother of all long tail applications is Excel: there are more applications out there built by users in Excel than anything else. Serena leveraged this long tail into an Enterprise Mashup SaaS offering. A sales manager gets information, for example, from Salesforce.com and SAP and ensures that his customer is credit worthy and has paid his bills.

The potential market for this enterprise mashup service is very large and growing fast. Business managers observe the consumer internet mashup sites and want to accomplish the same kind of mash-ups within their companies, across the extended enterprise, across their supply chain. With that enterprise mash-up service, they use a “drag and drop” tool, and bring together the disparate pieces of information into a coherent report. This phenomenon is an interesting case of Enterprise 2.0 thinking. This enterprise mash up is perfect for inter departmental collaboration, supply chain collaboration and acquisition integration. Serena is not just expanding the application types but enabling new information access to satisfy the needs of business users. Serena empowers the Facebook generation that enters now the business world. They have more IT knowledge than an IT professional coming into the business world even 5 years ago. The inclination is going to be to not ask IT for anything. They are going to innovate without permission. Serena enables them, but with governance, visibility and discipline built into the software. The visibility technology was provided by the acquisition of a venture: Pacific Edge. It is now called Serena Mariner.

The next shareholder value enhancing move: enable an Enterprise Mashup Marketplace

Serena created an Enterprise Mashup Marketplace. Company A wants to get a mashup from company B, they acquire it in the exchange. This is a public mash-up exchange and every customer also gets a private mashup exchange. For instance, if Apple wants to have a series of these mash-ups remain solely inside of the divisions of Apple, one division can access a mash-up which has already been blessed by Apple IT and is used in another division. Apple can also decide to monetize a mash-up in the public exchange. Another use case of this public/private marketplace is acquisitions. The acquiring company could open this set of corporate mash-ups to their acquisitions and integrate their information rapidly.

A new business model

Serena does not take a cut on the exchange transactions but charges a SaaS subscription fee for running the mash up. This is a big transformation for a company used to sell licensed software to people up front. In this enterprise mash up business, Serena gets its revenue when the customer runs the mash up, not when it builds it. Very different dynamic, but more aligned as a win-win with the customer. It is only when customers succeed in building good mash-ups that Serena gets paid.

This is also a viral play, the holy grail for software companies as customers do the demand creation, not Serena’s sales force. Serena has a couple more years to demonstrate to themselves and to Silver Lake and bond-holders that this transformation is successful in the marketplace and on the P&L.

Private Equity on Steroids

If it succeeds, based on my spreadsheet model, it could generate a 3-4x return overall in 3 -4 years, with the legacy part remaining worth a bit more then the $1.1B that Silver Lake paid and the new Enterprise mash-up business being worth a typical VC return of 6-10x.

Other cash cow businesses can buy up venture-funded businesses looking for liquidity and graft together strategic product portfolios that can offer superior returns.

This is Private Equity on Steroids.

SM: And I strongly urge you to view this hilarious YouTube video on Enterprise Mashups that Serena produced.

And here is David Berlind’s review at InformationWeek which introduces Serena’s talented senior director of global marketing Michael Parker who produced the video.

This segment is part 2 in the series : Private Equity on Steroids
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