Why Koch Is Buying the Rest of Infor
February 12, 2020 Alex Woodie
Koch Equity Development last week announced that it has bought the remaining shares of Infor that it didn’t previously own. The move puts Koch Industries in charge of the world’s third largest ERP software company, and the IBM i market’s biggest vendor. But what, exactly, drove the $110-billion industrial conglomerate into making such an investment is the subject of some speculation.
Infor, which has been flirting with an IPO for years, appeared to be on the fast-track for a Wall Street listing in January 2019, when it raised $1.5 billion in what, ostensibly, would be the last private equity deal before going public later in 2019 or early 2020. That deal, which was led by Koch Industries’ investment arm, Koch Equity Development, also included an investment by Golden Gate Capital, the San Francisco private equity firm that founded Infor (then called Agilisys) 18 years ago.
But the idea of selling shares to the public on the open market changed, evidentially, as Golden Gate Capital and other investors elected to sell their remaining shares to KED. Terms of last week’s deal weren’t disclosed, as all parties are privately held. But according to a story in Bloomberg, those 2017 and 2019 investments netted KED a 70 percent stack in Infor, and it just acquired the remaining 30 percent to become the sole owner. The deal reportedly valued Infor at $13 billion.
Exactly what motivated Golden Gate Capital and the remaining investors (including Infor management, which has been in a bit of flux following the departure of longtime CEO Charles Phillips last fall) is not exactly clear. One theory is that Wichita, Kansas-based Koch Industries wants to be become more invested in technology, and saw Infor as the best vehicle toward that end.
Koch Industries, which has annual revenues “as high as” $110 billion per year (the estimate comes from Forbes magazine but was repeated by Koch itself, which gives it the air of accuracy), was an Infor customer before becoming an investor, and now sole owner. Other Koch Industries subsidiaries in various manufacturing sectors also reportedly are Infor customers, so it could be that the alignment of incentives (not to mention reduced annual maintenance fees) was too aligned to ignore.
Koch Industries has invested more than $26 billion in technology-related investments over the past six years, and with Infor, it ostensibly invested more than a billion more (the exact number is not known, as the companies did not release terms of the deal).
David Dominik, a co-founder of Golden Gate Capital, provided a little insight into matter. “We are selling our remaining stake to Koch Industries, our partner in Infor for the past three years, because of the significant strategic value between Infor and Koch,” he stated in a press release.
Another theory is that Infor was growing too slowly and was too heavily indebted to appeal to Wall Street investors, who typically want a quick return on investment.
While Infor is widely considered to be the third largest ERP vendor, with a 5 percent to 6 percent share of the ERP market (according to Gartner and IDC, respectively), the company is not a serious challenger to ERP heavyweights Oracle and SAP, which reported fiscal 2019 revenues of $39.5 billion and €27.5 billion (about $30.1 billion), respectively. Infor reported $3.2 billion in revenue for fiscal 2019, which was just 3.0 percent higher than the prior year, according to Infor’s fiscal 2019 results (the company was not required to disclose financials, but did so anyway, ostensibly to build goodwill among prospective investors who value clarity in corporate governance). Over a decade ago, the company touted in excess of 70,000 customers. Today, that number is 68,000, despite continued acquisitions.
Meanwhile, the New York City-based software company has been trying to reduce its debt load for years. When KED increased its stake in Infor a year ago, Infor held $6.1 billion in debt, and planned to use most of the $1.5 billion investment to refinance some of that debt. At the time, the company’s debt load (measured as debt compared to earnings before interest, tax, depreciation, and amortization) was 6x, which was down from 2018 but still higher than ideal for a publicly traded software company.
“Obviously we’re still generating quite bit of cash,” then-CEO Phillips said in a conference call at the time. “We would generate cash from an IPO, which we would use for debt pay down as well . . . . Our perspective is that we’d be public with a leverage of less than six times.”
The need to reduce debt basically goes away as a solely owned subsidiary of Koch Industries, which is one of the largest privately held companies in the United States. With Koch Industries assuming the assets and liabilities of Infor, the software firm instantly becomes one of the most well-financed IT companies in the market.
Jim Hannan, an executive vice president with Koch Industries and its CEO of enterprises, said Koch’s resources will bolster Infor’s fortunes. “Software is no longer an industry vertical; it is a disruptive layer that is transforming every facet of society,” Hannan said in a press release. “As a global organization spanning multiple industries across 60 countries, Koch has the resources, knowledge and relationships to help Infor continue to expand its transformative capabilities.”
We’ll have to wait to see how it plays out, as the acquisition is subject to customary conditions and regulatory approvals and is expected to close in the first half of 2020. As the largest IBM i software vendor, Infor has an outsize influence on the IBM i market, which makes it an important company to watch.
In particular, we’ll look for signs that the new Infor will keep its old promises. The original incarnation of Infor – which was born of acquisitions of big IBM i software houses like SSA, MAPICS, JBA Software, Intentia, Infinium, Lawson Software, Daly & Wolcott, and others – pledged to never sunset any IBM i products (they were called “OS/400 products” way back when, and then “i5/OS” products). By all accounts, Infor has kept that promise. However, Infor only actively develops three IBM i-based ERP suites, the LX, XA, and System 21 packages, all of which are being transitioned from RPG to Java.
Infor likely still has 10,000-plus paying customers that run IBM i solutions. (Infor cited 19,000 customers in 2013 and stated there were about 14,000 customers in 2015, which probably puts the current IBM i installed base just over five digits.) However, because these IBM i solutions don’t run on “industry standard” hardware, they’re not easily transitioned to the cloud, which is Infor’s stated direction these days. And while Infor’s AI solutions, such as Coleman, are technically capable of being supported and adopted by its IBM i customers, there doesn’t appear to be a big push on the part of Infor or its customer base to adopt it.
An Infor executive, Cormac Watters, has gone on record saying that Koch Industries knows the Infor company “warts and all.” While we don’t know whether Watters was referring to the IBM i installed base here, it wouldn’t be surprising if he was, considering the widely held perception that the IBM i server is a “legacy” platform that’s past its prime.
By all accounts, Infor’s IBM i customer have stubbornly stuck to their adopted systems, with thousands going off maintenance to self-support their heavily modified systems rather than migrating to one of Infor’s supported suites. It’s unclear if Infor could have done much to change this outcome. Now the industrial arm of one the country’s most politically conservative industrialists must seek to create relationships and find common ground with a group of IBM i shops that are equally conservative when it comes to technology investments – and maybe even more so.