An i5 Platform: Q&A with Marlin Equity's Top Brass

Published: May 21, 2007

by Timothy Prickett Morgan

Two weeks ago, Marlin Equity Partners, a relative newcomer in the private equity business that was founded by people with more than a passing familiarity with the i5/OS and OS/400 ecosystem, acquired Aldon, one of the big providers of application lifecycle development tools in the System i market. The top brass at Marlin Equity, which has big plans for the i5 market, took some time out of their schedules to chat about those plans and to explain why they are entering the market as an investment platform for the future.

To get more background on the Aldon acquisition, please read the story about the deal in last week's issue, which also explains what Marlin Equity is. The three executives who took part in the conversation were David McGovern, managing director at Marlin Equity; Peter Spasov, director of business development; and P.J. Nachman, vice president.

Timothy Prickett Morgan: Thanks for taking the time to chat. I just wanted my readers to get a better sense of who you are and what your plans are.

I used to be able to say that it wasn't every day that companies come in from the outside and invest in the i5/OS and OS/400 market, but it is kind of every week now.

[Laughter]

David McGovern: This is a private equity firm that I founded in 2005. I had been the head of mergers and acquisitions at Gores, here in Los Angeles, and I had led some big transactions for Gores, including taking Veriphone out of Hewlett-Packard, which is now several companies. I took The Learning Company out of Mattel, which was a $3.5 billion deal. The SSA transaction, which you mentioned in your article, is the one I did with Cerberus Capital Management and Foothill Capital back in 2000. I did a bunch of enterprise software.

While I was at Gores, I created a pretty good track record for myself, and decided to leave Gores in 2005 to strike out on my own. I raised a small fund of $120 million very quickly from a handful of institutions, and we have good institutional backing and strong partners behind us. We did the first closing in June 2005, and the second closing in August 2005, and since then we have been focusing on putting that money to work.

Marlin is interested in acquiring mature businesses that we think have strong management teams and are in consolidating industries. We look at businesses where revenues are driven either by having a mission-critical product or system, or brand power, or another defensible position. Despite the technology background that I have and the deals that we have done to date, we are focusing on three verticals. Technology will be the broadest and probably the most frequent area, but we are about to sign up a consumer deal and we are also focusing on healthcare businesses. Generally speaking, we are industry agnostic, so long as the company meets a certain profile for us.

We try to bring operational improvements to the companies that we work on. We have operators who work with us not only on our diligence, but also who bring best practices to the companies that we buy, and obviously because we focus on the small deal market, we think there is a lot of opportunity to professionalize the great family run businesses that have reached the point to where we can come in and help them with their operations and also help them to pursue acquisitions with our capital. And we can also help them to shape out their strategies in terms of building their businesses through acquisitions. That's basically what we are doing.

Timothy Prickett Morgan: What kind of deal sizes are you doing, generally? What company sizes are you looking at? I don't have a sense of the scale that is appropriate to the size of the fund you have. Some of the private equity funds that have come into the tech market are quite large.

David McGovern: We're writing $10 million to $25 million equity checks. So we fall into the small deal market. We could, through partners, bring more to bear. The XKO Software-CMS Software business is $55 million in revenue. Obviously in technology, these are higher-margin businesses, and I would say the size of the firms that we look at generally run from $10 million to $200 million in revenues.

Timothy Prickett Morgan: Why did you come into the System i market? Obviously, you have had some experience with this market in the past.

David McGovern: The CMS Software acquisition was a recent one. Certainly, we think that the System i market is not going anywhere. There was a while there where I think people thought it would decline, but there's a lot of legacy investment in that space and there is a lot of opportunity to be a good software provider.

In particular with CMS, we like the m5 product that they have developed, and we think it gives us a great opportunity to position customers in the XKO base for the m5 product. We see great opportunities with the marriage of CMS and XKO. With CMS being primarily a North American business and XKO selling into the United Kingdom, this creates opportunities to share resources, and it gives us a nice global footprint and the ability to do acquisitions to build up those organizations.

Timothy Prickett Morgan: The next question I would ask is why acquire in the application lifecycle management space in general, and why buy Aldon in particular? I have been told that what you do at Marlin is acquire in one spot, build a platform, and then build further from there. You have done five acquisitions so far in the ERP space, and now after Aldon, I would expect you to do more acquisitions in the ALM and adjacent tools areas to build that business out, too.

P.J. Nachman: We expect to build out with Aldon in a very similar way that we have built out in ERP software. We feel very strongly that the iSeries portion of the market is not going anywhere any time soon, and more particularly around the product set, Aldon has a very dominant or strong position within the iSeries, and they also have products that surround that, which positions the company well for growth and which are not just geared for iSeries customers only. There's a lot of opportunity to sell into Unix, Linux, and Windows environments where the customer might be iSeries-centric, but also operates these other environments. There is also a large installed base of iSeries customers where you can upsell additional products.

Timothy Prickett Morgan: That has been my experience too at IT Jungle. But can I give Marlin some advice? Can we not say that the System i or iSeries market is not going anywhere? There are obviously two different connotations to that phrase. . . . and this is how my kids are going to get to college.

[Much raucous laughter]

David McGovern: We certainly agree that the iSeries market is not going away. We think that the iSeries market is going somewhere.

P.J. Nachman: And Aldon is a growing business, and it has been growing within the iSeries segment and outside of the iSeries market.

Timothy Prickett Morgan: My experience from watching another hot area in the System i market--high availability software--is that this is something that a lot of businesses should have long since deployed, but there still appears to be price sensitivity to HA software, even after system prices have come down dramatically and HA software vendors have slashed prices after a wave of competition. HA software installations never quite grew as much as many of us expected, even if it is a very good market to participate in.

Now that Aldon has equity backing and the ability to bring products to market in different ways and at different price points, can you deal with price/sensitivity in the ALM space? Can you push for a broader market with lower prices and therefore make more money? Or does ALM stay among the top-tier companies that have truly complex development efforts. What I am trying to ask in a convoluted way is: How far can you push this thing is?

David McGovern: I don't think our investment thesis is really based on being able to answer that question. And to be honest, I am not a technologist. We have a specific investment criteria, we look at what we are buying, and we feel comfortable that with the Aldon business there are opportunities for growth and we will leave it to the management team to advise us about where and how we can chase those opportunities.

P.J. Nachman: We were extremely impressed with the Aldon team's knowledge of the market, their customer-centric approach, and their products and strategies. Really, in our view, they understand their business and we would leave it up to them.

RELATED STORIES

Aldon Acquired by Marlin Equity Partners

Aldon Unveils Plug-In Support for WDSc 7.0

Aldon Tackles Parallel Development Problems with LMi 7.5

ERP Vendors CMS Software and XKO Software to Merge

System i Shops Plenty Annoyed About Missing WDSc Features

IBM Seeks More CODE/400 Converts with WDSc 7.0

In Formation: Q&A with Infor Chairman Jim Schaper

                     Post this story to del.icio.us
               Post this story to Digg
    Post this story to Slashdot