What Koch’s $2.5 Billion Infor Investment Means For IBM i
November 28, 2016 Alex Woodie
Koch Equity Development LLC, the private equity arm of Koch Industries, will invest more than $2 billion into IBM i ERP giant Infor, the companies announced last week. Infor says it will use the cash to expand its business, while news reports say some of it will go to pay off earlier investors in the company.
Infor wouldn’t comment on questions about what exactly it’s going to spend KED’s reported $2.5 billion investment, beyond what it said in the press release. Even IBM i customers would benefit, an Infor spokesman said. “All existing and future customers will reap the benefits of Infor’s accelerated innovation, expanded distribution, and continued disruption of the enterprise applications industry,” he said.
Clearly, the company is eager to challenge Oracle and SAP for its share of the ERP software pie, which Allied Market Research says will be worth $42 billion globally by 2020. Infor had revenues of about $2.8 billion in 2015, according to a review by Moody’s Investors Service of the company. That’s just a fraction of what SAP and Oracle draw, but with 90,000 customers, Infor has a much longer reach into the mid-market, which the two ERP bigwigs usually don’t touch.
However, it would seem that at least some of the money would go toward paying off earlier investors, including Golden Gate Capital, which has had a majority stake in the company since it changed its name from Agilisys so many years ago.
“The transaction,” read a Reuters story two weeks ago, before the news broke, “would give Golden Gate Capital a chance to cash in on a portion of its long-held investment in Infor.”
According to Infor, the investment, which is expected to close in 2017 and is said to value Infor at $10 billion, will give KED control over four of nine seats on the board. Four more seats will be controlled by Golden Gate Capital and another longtime investor, Summit Partners, while the ninth chair will be held by CEO Charles Phillips, who is also a chairman and a significant shareholder in the privately held, New York-based company.
That doesn’t mean that Golden Gate Capital will give up all control or influence over the direction of the ERP software company. “We remain a meaningful investor in Infor and will continue to support the company in the years ahead,” Rishi Chandna, managing director at Golden Gate Capital, said in a press release.
However, some of the control will certainly go to KED, and more specifically, to Charles Koch, who took a personal interest in this investment in Infor, according to the Reuters story. The story quoted Phillips as saying: “[Charles Koch] was looking to do more in technology and realizes he needs to transform his own companies. . . . He’s been looking for the right platform to help modernize his companies.”
Georgia-Pacific, the Atlanta-based pulp and paper company, was also catalyst in KED’s investment. The company, which owns the Brawny, Quilted Northern, and Dixie brands, is a subsidiary of Koch Industries. It’s also a longtime user of Infor’s ERP software.
According to Reuters, Phillips said that the fact that Georgia-Pacific and other Koch holdings run so many Infor products was a factor in KED prevailing over other potential investors. It’s unclear what ERP products Georgia Pacific uses today, or whether they run on the IBM i platform. In the past, the company had been big users of MAPICS and Infinium, among other IBM i-based produces. MAPICS, of course, was originally developed by IBM in Atlanta, and subsequently spun it out into its own company. MAPICS was one of Infor’s first acquisitions way back in 2005.
Infor opened the door to more investment in September, when it retained Morgan Stanley to oversee the funding round. Other suitors reportedly included the Blackstone Group and Apax Partners. Infor has openly talked about the possibility of having an initial public offering (IPO) of stock, but KED’s large investment could delay the need for it.
Infor says an IPO is still a possibility. “Koch Industries, like our existing investors Golden Gate Capital and Summit Partners, is well-financed and believes in long-term investments. This leaves all options on the table for raising capital in the future, including an IPO,” an Infor spokesman tells IT Jungle.
While Infor had about $700 million in cash when its fiscal year closed in April, the company maintains a relatively high debt load. According to Moody’s 2015 research note, Infor’s debt-to-asset ratio showed leverage in excess of 7X, which was a large reason why it gave the company a B3 (high risk) rating for its unsecured note offering last year.
Infor needs to grow its earnings before it can IPO, and the KED investment will give it additional funds to go after acquisition targets that could boost its revenues. Look for Infor to make more moves in the cloud. The company says it has 66 million cloud users, and that cloud-based subscription now accounts for half of its revenue. Those are pretty significant figures for a business that’s just several years old.
Unfortunately, the IBM i platform doesn’t really factor into Infor’s cloud plans. While the company ostensibly offers some Infor products via its partners’ cloud platforms, they generally aren’t the sort of modern, multi-tenant, public cloud applications that most customers want. Perhaps the KED investment could change that and spur a bigger investment in IBM i-based clouds. But for the meantime, don’t be surprised if Infor keeps the same trajectory with its IBM i products, while offering incentives for customers to migrate off the platform and into pretty X86-based clouds.