By Tom Foremski for SiliconValleyWatcher

Silver Lake Partners, the leading Silicon Valley private equity firm recently took Serena Software from public to private in a $1.2 bn deal. I spoke with Mark Woodward, the CEO of Serena about the move.

Serena provides software that helps companies manage their information technology and has been in business 26 years and has 15 thousand customers. Mr Woodward said that despite several acquisitions, including the acquisition of a much larger company--Serena was unable to budge its market cap valuation.

"We felt that Wall Street didn't understand our business and despite working hard in making the right acquisitions, and more than doubling our revenues, we still had the same market cap valuation. It was very frustrating."

In addition Mr Woodward said that it was difficult to make long term planning decisions because of the constant focus on meeting quarterly numbers. "For example, we wanted to expand our services business as a strategic move but services is a lower margin business and so the market would have penalized us, but it makes sense from a long term perspective."

Serena met with four large private equity firms and decided to go with Silver Lake because it had a better understanding of its business. Silver Lake has people such as James Joyce, the former CFO of IBM, and Dave Roux, a co-founder of Silver Lake and he used to head M&A at Oracle--both men are now on Serena's board.

"The Silver Lake people have great connections and they have a lot of experience," says Mr Woodward. "Most members of public company boards are focused on reducing their liability, and on governance issues--which is fine. But our board now has the same interests as the company and is there to help us grow the business rather than try to limit their personal liability."

Serena's long term strategy is focused on investments in the Asia Pacific market where growth is expected to be three times greater than anywhere else; and in the federal government sector.

There are drawbacks to being a private company and one common complaint is less media attention. "We don't get covered by the financial analysts anymore but they weren't doing a good job anyway, and we are getting plenty of attention from the press on our initiatives."

The expense of Sarbanes-Oxely compliance was not a factor in taking Serena private, he said.

Silver Lake's big coup was taking Seagate private nearly 7 years ago as part of a complex deal with Veritas. Seagate again became a public company at the end of 2002 and Silver Lake is still the largest shareholder.

Mr Woodward says that there will likely be many more similar deals as private equity firms take other companies private, remake them, and then bring them back to the public markets. But he noted that there are few tech companies around that have the cash flow needed to service a large debt, a strong management team, and also have the capital to invest in long-term business initiatives.

He predicted that with several very large private equity funds competing for the best companies, in a year or so, those funds will have to reset their internal rate of returns and take on companies that they would reject today.

"The goal is to reposition Serena and then to eventually take it public again in three to four years. By that time, Wall Street will have forgotten about Serena and we can position it how we like. And by that time, our business will be much stronger because we can follow through on the long-term business strategy without worrying about quarterly numbers and the effect on our market cap."

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Here are some of Silver Lake's investment announcements:

Serena Software To Be Acquired By Silver Lake Partners In A Transaction Valued At Approximately $1.2 Billion

November 11, 2005

KKR And Silver Lake To Acquire Agilent’s Semiconductor Unit For $2.66 Billion

August 15, 2005

Nasdaq To Acquire Instinet - Silver Lake Partners To Acquire Instinet Institutional Broker

April 22, 2005

Sungard Data Systems To Be Acquired By Private Equity Group For $36 Per Share Or Approximately $11.3 Billion

March 28, 2005