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Smarter Libraries through Technology: The Role of Private Equity in the Library Automation Industry

Smart Libraries Newsletter [January 2013]

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As libraries make investments in technology, it's important to be aware of the nature of the businesses that provide these products and services. We naturally evaluate software products on the merits of their functionality, alignment with current and anticipated library requirements, the soundness of architecture, and other technical considerations. But the software a library acquires today is only a snapshot in time over a broader lifecycle. Libraries also have a vital interest in the ability of a vendor to provide ongoing support and development of those products. Libraries need to have confidence that the organizations from which they acquire their strategic technical infrastructure will not only remain viable, but will aggressively develop those products in the future.

Because libraries have so much at stake in the performance of the corporations that comprise the library automation industry, I spend much effort gathering information and analyzing it. Today I see an interesting mix, including large corporations with a global presence and many small to medium-sized companies that tend to operate within a given country or region, often focusing on a specific type of libraries. Almost all are for-profit corporations, with the obvious exception of OCLC, which has a complex business structure that includes for-profit units within its broader non-profit organization.

Multiple ownership models can be seen among the major library technology vendors. OCLC is owned and governed by its member libraries. SirsiDynix, Ex Libris, Infor, and Innovative Interfaces operate under the full or majority ownership of private equity investors. Auto-Graphics is the only publicly-traded company. Most of the others are privately owned by their founders, executives, or other investors. Since there has been a spurt of private equity investment and ownership in the library automation industry, it seems worthwhile to work through some of the implications of this arrangement for libraries. While I make an effort to study and analyze the industry as much as I can, keep in mind, as I make these observations, that I am not an economist or business expert.

Private equity discovered the library automation industry beginning about 2005, when Golden Gate Capital acquired Geac, once a dominant force in library automation, but by then a large IT company providing software and services to banks and other sectors. SirsiDynix and Ex Libris came under private equity ownership in 2006. This year Innovative Interfaces, a company that had once set itself apart in the industry as owned and operated by its founder, came under majority ownership by a pair of private equity companies.

Private equity firms' investments in companies providing technology products to libraries can be seen as a positive indicator of the health of the industry. Despite libraries' limited resources and the declining budgets of recent years, automation companies show reasonable growth potential. Libraries increasingly rely on technology, even when other aspects of their operations, such as collections and personnel, suffer cutbacks. While the business creating technology for libraries may never show soaring growth, it can offer opportunities for sustained, moderate, long-term prospects. While strategies vary, private equity firms tend to invest in stable, mature companies, unlike venture capital funds that get involved with companies at earlier stages, when the risks are considerably higher. In my observations within our industry, the companies that attract private equity investments are large, wellestablished, and positioned for long-term growth.

Private equity firms can also effect consolidation through the acquisition of multiple companies and merging them into a single entity. The library automation industry has seen considerable consolidation, resulting in a fewer number of quite large companies. Consolidation can be disruptive to libraries if it means that the automation systems that they rely on will not be further developed. But the merger of companies does not always mean immediate consolidation of products. We see examples, such as Ex Libris, that maintain and develop multiple ILS products. I think that merged companies ultimately work toward a single flagship product, which can be accomplished by developing new-generation systems that will supersede multiple legacy products.

With ownership comes control. Private equity firms investing in a company will require representation on its board of directors proportional to its ownership stake. That board, in turn will formulate high-level business strategies and assemble an executive management team to execute those strategies.

In some of these transitions, founders, who may be entrepreneurial technologists, hand-off to professional executives, usually with experience in related industries. I'm always interested to see a mix of incumbent executives, knowledgeable about libraries' technology needs, with new executives from related industries. With Ex Libris, the same management team has led the company through three different private equity owners. SirsiDynix saw a turnover in management when it was acquired by Vista Equity Partners. Innovative, as described later in this issue, has seen new appointments at the C-level with more continuity at the VP level.

Private equity ownership involves a complex business arrangement. In addition to the investment from the private equity firm's fund, most deals also include sizable bank loans. The company takes on the burden of repaying that debt. Some portion of the money that libraries pay for the products of these companies flows out of the company to investors and banks. Likewise, an owner may take profits out of the company or reinvest in new development. Ideally, I think that libraries would like to see all of the money they spend on technology go toward the support and development of current and new products. But practically, some layer of financial and administrative overhead is incurred. A key question is whether private equity ownership results in funneling a disproportionate level of capital out of the library economy.

I'm especially interested in seeing sufficient development capacity in the library automation industry to create technology products that will help libraries accomplish their strategic missions. My long-time readers will recall that I've often complained that automation products usually lag behind changes happening in libraries and broader society. We need much more aggressive product development. The capacity some companies to amass large development teams seems to me like at least one path toward this goal of more aggressive software development. In this issue of Smart Libraries Newsletter, I include a table that documents the personnel resources devoted to research and development in companies owned by private equity. The numbers point toward significant potential, and we're seeing the results in the creation of this new genre of library services platforms that has been chronicled in this newsletter.

So as I think about the ownership arrangements of the companies from which libraries acquire technology, private equity ownership is simply a reality of the industry. The ownership structure matters less than the company's product roadmap, its capacity to develop products and deliver support and services. Private equity ownership of companies has been a part of the industry long enough to establish a track record that can be compared against the ownership models. Almost by definition, companies involved with private equity are going to be large and stable. With size comes the potential for greater impact. Libraries generally appreciate the lack of disruption that comes with stability.

I've come to consider ownership as a fairly neutral factor in assessing the relative strengths and weaknesses of companies. I see both positive and negative performance factors among those owned by private equity to about the same extent as those with other ownership structures. As libraries form their technology strategies and make decisions regarding the specific products and services to fulfill them, ownership structure is but one among many factors in the equation.

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Publication Year:2013
Type of Material:Article
Language English
Published in: Smart Libraries Newsletter
Publication Info:Volume 33 Number 01
Issue:January 2013
Page(s):1-2
Publisher:ALA TechSource
Series: Smarter Libraries through Technology
Place of Publication:Chicago, IL
ISSN:1541-8820
Record Number:18690
Last Update:2022-12-05 15:39:09
Date Created:2013-12-10 15:01:30
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