Page 46 - Forbes - USA (March 2018)

Th e World’ s billio na ir e s

S
RoBeRt mitH Ventyx, increasing the number of products it sold to existing
customers substantially—a subsequent sale to ABB resulted in
ed that Smith roll up his sleeves and execute the plan for them. a profit of nearly $1 billion.

They backed up their offer with a commitment of $1 billion When the dust settled, Smith’s first buyout fund returned
of the company’s cash, as the sole investor, if he started a pri- 29.2% annually net of fees. Smith raised money for a sec-
vate equity fund. “I had one of those in-the-mirror moments,” ond fund from institutional investors, returning a net 27.7%
Smith says. “I looked at myself and asked, ‘If I don’t do this, annually. In 2011, seeking to escape the Silicon Valley bub-
how will I feel about it ten years from now?’ ” ble, Smith moved Vista’s headquarters to Austin, Texas. He

The short answer: regretful. And so in 1999 Smith left Gold- could, by this point in his career, do pretty much anything he

man and soon began recruiting cofounders, notably a busi- pleased.
ness-school classmate, Stephen Davis, and a young analyst who “I still experience racism in my professional life,” Smith
worked under him at Goldman, Brian Sheth. The son of an In- says. But by being smarter and working harder, Smith proved

dian-immigrant father with experience in tech marketing and the American Dream extended to the finance industry, where
an Irish-Catholic mother who worked as a reinsurance analyst,
Sheth would provide the yang to Smith’s yin, focusing on ac-
quisitions and divestitures, so that his boss could concentrate

on investors and the companies themselves. Their relationship a neW PatH to PlayBooK PRoFitS
would become ironclad: “When something is happening with
There was a time when buyout firms like KKR and Apollo could be

our families we are each other’s first call,” says Sheth, who vaca-

tions with Smith and served as best man at his wedding. successful simply by piling debt on a company, cutting costs and then
letting the magic of leverage and compounding do its work. But what
When Smith quit, most of his colleagues thought he’d lost
his mind. He was on a partnership track at Goldman, which worked in the past may no longer be viable. There is now more than
meant he was set to receive a multimillion-dollar wind- $1 trillion of private equity cash chasing deals and bidding up prices.

fall given the firm’s impending initial public offering. What’s According to DealLogic, private equity firms did $58 billion of tech

more, banks didn’t lend against software companies because transactions in 2016, a third of all U.S. deals.
they didn’t have hard assets. How could Smith run a lever- Even Vista has had to pivot from buying legacy software compa-
aged-buyout business in nies to acquiring higher-growth operations, often at big prices and

software without lever- valuations.

age? The concentration “Software Vista’s acquisition of Marketo, a marketing automation software
risk also seemed huge— contracts are leader based in San Mateo, California, is a good example. After in-
investing in a single in- better than vestors became disenchanted with its less than stellar 30% to 40%
dustry where a few inno- revenue growth rate, Marketo’s share price plummeted by some 50%

vative lines of code from first-lien debt.” in early 2016. Then in May 2016, Vista swooped in to buy the compa-
a competitor could make ny, putting up $1.3 billion in cash in a $1.8 billion deal. It was a gen-
a business obsolete over- erous 64% premium, but Vista knew that before long an operation-
night. al overhaul, coupled with the small amount of debt it added to its

But Smith saw things differently. Software was eating the balance sheet, would turn the cloud-based marketing software com-

world. Soon every company would become a software com-

pany into a winner. Recently, Marketo’s cash flow (Ebitda) has turned
pany, its business digitized. A portfolio of software compa- positive. ÑN.V.

nies serving 50 industries would be diversified with a stream

of recurring revenue, given the shift to “software as a service.”

Smith’s bet: Wall Street would soon realize that software com- ThE STOCK ThE dEaL

50 PEaKEd in CLOSES On
panies not only gushed cash but actually had terrific assets to FEBRUaRy taRGet: maRKeto aUGUST 16,

a
t
a
e
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:

m
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o
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2014 aT
2016, SO
lend against—those ironclad maintenance contracts. $45.00. STOCK STOPS
TRadinG.

“Software contracts are better than first-lien debt,” Smith

40 in MaRCh 2016, ViSTa
says. “You realize a company will not pay the interest payment STRiKES a dEaL TO
BUy MaRKETO FOR

on their first lien until after they pay their software mainte- $35.25 PER ShaRE.
nance or subscription fee. We get paid our money first. Who

30
has the better credit? He can’t run his business without our
soft ware.” EBiTda
TURnS
iT hiT an aLL-TiME
In 2000 Smith opened Vista’s doors in San Francisco. His LOW OF $12.86 in POSiTiVE
aT ThE
FEBRUaRy 2016.
first acquisitions were all equity. As the firm went from one 20 EBiTda iS aT -$50 MiLLiOn in STaRT OF

2018.
12 MOnThS PRiOR TO dEaL.

profitable deal to another, Smith eventually got lenders to fi-

nance Vista’s purchase of Applied Systems, an insurance soft-

2 0 1 4 2 0 1 5 2 0 1 6

ware maker, in 2004, Vista’s first leveraged buyout. In 2007 10

Vista merged software companies serving utilities and created
44 | FORBES MARCH 31, 2018