Two venture capital (VC) firms, Blackstone and Vista Equity Partners, purchased WCC’s managed service provider (MSP), Ellucian. The terms of the deal remain under wraps for now, but Ellucian’s former owners initially planned to sell the company in 2020.
The timing of the sale was important since the venture capital owners borrowed heavily to buy Ellucian in 2015. TPG Capital and Leonard Green & Partners had to sell the company to avoid owning it when its multi-billion-dollar loans came due in 2023.
In 2015, Ellucian’s former owners purchased the company in a $3.5B leveraged buyout. In a leveraged buyout, the buyers borrow heavily to purchase a company. Then, they assign their debt to the company they purchase. The company is left to make interest-only payments on the multi-billion-dollar debt until the next sale.
Borrowing to buy a company enables the investors to own a company without putting any of their own money at risk. (As long as they can sell the investment before the loan comes due.) Getting out from under the loans is essential because, in Ellucian’s case, the loans had an interest rate above 9%. Following their failure to sell the company in 2020 as initially planned, the VC owners refinanced the loan deal last year.
Since making money is Job #1 for the VC owners, they typically don’t invest heavily in the new property. That’s important because venture capitalists aren’t really in business to make software. Or provide managed services. They’re in business to make money.
Sale price of Ellucian will determine WCC’s future costs
Although the terms of the deal weren’t disclosed, the 2020 attempt to sell the company is informative. At that time, Ellucian had a market value of about $5.5B. It’s a good bet that the new owners acquired the company for some number between $5B and $6B. The purchase price will determine how much more money the company now needs to make to stay ahead of its new (larger) debt.
Sales to new owners are always dicey. New owners need to do things differently because the company’s financial picture has changed. What worked for the previous owner will not work for the new owner, largely because the company’s debt has increased.
If you look carefully at the press releases that announced the sale, you’ll find that the new owners talk about their focus on SaaS and expanding Ellucian’s global market share. But no one mentioned managed services. It will be interesting to see exactly how expensive doing business with Ellucian becomes for WCC over the next several years. It will also highlight the true cost of giving away unnegotiated, no-bid contracts.
Washtenaw County taxpayers need WCC Trustees who will ask the question, “Do we really want to divert a never-ending stream of tax dollars meant for educating low-income students to venture capitalists?”
Photo Credit: slgclgc , via Flickr