Can CIOs Profit from Leveraged Buyouts?

The barbarians aren’t at the gate anymore–they’ve ripped it out of the ground and stomped right into corporate America’s backyard. Private equity firms, labeled "barbarians" by an earlier generation of corporate managers, have been buying up companies at a record rate; this year alone they’ve purchased big-name businesses such as Alltel, Chrysler, Equity Office and TXU for multibillion-dollar sums. And rumors spring up seemingly every day about what company might be next.

For CIOs, the buyout wave can be a blessing or a curse, depending in large part on the CIO in question.

Private money–the biggest players include Blackstone Group, Kohlberg Kravis Roberts, Bain Capital, Carlyle Group and TPG–specializes in the leveraged buyout, where cash raised from investors like pension funds is supplemented by often substantial amounts of debt. That frequently means operations of a purchased company are realigned to jumpstart growth and pare down liabilities incurred in the deal.

As equity firms begin that process, they look to the CIO to be a major player. A buyout can be a tremendous opportunity for an IT executive to drive change. But for CIOs who prefer the status quo, a buyout can be bad news. "If you’re a capable and ambitious CIO, this could be one of the best things that happens to you," says Asiff Hirji, former CIO and COO at investment firm TD Ameritrade who now works for TPG’s operating group. "The entire transformative program is going to have a significant IT component to it. If IT wasn’t at the table before, it sure is now."

From Hirji’s view, private equity backing offers some clear benefits. For starters, companies don’t have the quarterly reporting pressures of publicly traded firms. That, Hirji says, means CIOs can focus on the big picture without worrying about deadline constraints. And private equity firms aren’t bashful about pumping cash into properties to help accelerate their progress, so CIOs can find resources for their projects more readily.

Also, Hirji says, equity firms can provide a "sanity check" that’s often missing in public companies. Most private equity outfits employ operations veterans who help portfolio companies push change.

That kind of close interaction, which helps differentiate private money buyouts from other types of mergers and acquisitions, can help IT get a more prominent seat at the corporate table, concurs Ed Mitzel, group senior vice president and CIO at Gate Gourmet, an airline catering and logistics company. TPG acquired Gate Gourmet in December 2002, and Mitzel came on board in 2005 to lead an overhaul of the company’s systems and application architecture.

"The shareholder’s at the table, listening to what you’re saying, and actually helping you with the process," Mitzel says. "The ability to share ideas, have them act as a sounding board, is very important as part of the process. For me, as a CIO, it adds tremendous value."

But there’s another side to this kind of close relationship: The shareholders are in your face, with a vested interest in how the company performs. That management style can be a turn-off for CIOs used to hands off from above. "I’m not saying we’re looking over their shoulders all the time, but we’re very interested and involved shareholders," Hirji says.

Valerie Germain, a partner specializing in technology at executive search firm Heidrick & Struggles, echoes the warning. "The investors may very well have people on their staff who know a lot about technology and are there to provide the coaching, but they’re always evaluating you," she says. "It’s not the same as being at a public company; you don’t feel there that shareholders are literally evaluating you."

So what can CIOs do to prepare? It’s not easy for IT executives to make themselves attractive to a private equity firm, Germain says. Not everyone has had the experience of driving a major change project–like reorganizing the IT hierarchy or managing a systems overhaul–and the skills learned from that experience are hard to come by.

But CIOs can make sure they have a solid grip on IT’s value, for driving costs down and driving profits up.

Gate Gourmet’s Mitzel says CIOs should approach every day at work as if it were their first day on the job. He recommends thinking about what they’d do differently, what changes they’d make organizationally and architecturally. If the barbarians do come around, the CIO will be in the hot seat. "There’s going to be change," he says. "You should get set for that, mentally."