Library Technology Guides

by Marshall Breeding

Consolidation through mergers and acquisitions has been constant through the last three decades of the library technology industry. The drivers behind consolidation include the desire for company growth and operational efficiency. Companies grow organically by selling products and services to additional customers. Organic growth possibilities are limited, especially in finite markets such as library technologies. Business acquisitions accomplish growth more rapidly, assembling companies with broader product portfolios and access to more customers. Ambitious product strategies often cannot be realized without substantial financial resources.

Companies able to avoid involvement with major external investors and acquisition can achieve success while retaining control over their destiny. Self-funded development initiatives and organic sales can drive gradual growth of a company. While this business model may not produce the next industry giant, benefits can be accomplished in terms of customer and employee satisfaction that may be more difficult to achieve in organizations with strenuous demands by financial stakeholders.

Mergers and Acquisitions Basics

The realm of mergers and acquisitions involves complex business and financial principles orchestrated by professionals with extensive specialized knowledge and experience. Some basic concepts can lend some context to the events that have transpired in the library technology industry.

Reducing operational costs

A harsh reality of mergers and acquisitions involves the possibilities of achieving operational efficiency through reduced spending on redundant efforts. When two companies combine, duplicate administrative and business functions are usually eliminated. The consolidation of executive roles, office locations, and business systems such as ERP and CRM can produce significant savings with little impact on product development and support capacities. Separate sales and marketing forces can be blended to address an expanded product portfolio. The total number of personnel employed following a merger will almost always be less than the workforces of the companies involved prior to the acquisition.

Customers can benefit from an acquisition when more resources are directed toward product development and support. Larger-scale companies have the potential for increased capacity to address development initiatives beyond the reach of smaller ones. This benefit can go unrealized when operational savings preclude maintaining adequate capacities for support and development. Possible downsides of acquisitions loss of personnel with expertise in critical areas.

Company Valuations

As companies change hands, the buyers and sellers must come to an agreement regarding the value of the company. Calculating the value of a company takes into consideration in a variety of objective factors, but also includes predictive models to estimate potential performance going forward. A buyer that sees strong synergies with its own business and product strategies may be willing to pay more than an investment firm focused more on current and historic business metrics.

Some of the key factors considered in company valuations include:

• The total annual revenue of the business spanning all income sources, including historic trends to demonstrate the sustainability of current revenue levels
• The annual recurring revenue, concentrating on the income sources derived from multi-year contractual commitments from customers. These revenue streams include annual subscription fees for software-as-a-service offerings and service contracts. One-time revenue sources such as an initial purchase of a software license would not be considered annualized revenue. The importance of annual recurring revenue provides strong motivation for technology companies to focus on long-term SaaS and hosting contracts.
• EBITA (Earnings before interest, taxes, and amortization) describes the profitability of the company. Multiples of EBITA are often a key part of the formula that determines the value of a business. Multiples of 5x to 10x EBITA are common in the technology sector. Businesses with large portions of annualized revenue are often valued at higher multiples of EBITA.
• Customer acquisition and retention trends. The demonstrated ability for a company to win competitive contracts for new business and to retain existing customers are important factors in assessing the value of a company and its prospects for growth.

The terms of acquisitions involving private companies are usually confidential, with only limited information announced publicly. The price paid for the company and any bank financing involved are rarely revealed. Financial details of acquisitions made by public companies will be included in related announcements and filings.

The following table shows some of the valuations of companies that have been acquired in the library sector. Some valuations are estimates presented in business news sources at the time of the transaction.

Strategic versus Financial Acquisitions

Business acquisitions can be fall into two general categories:

• Financial Acquisitions: Some changes in ownership involve a transition from one set of investors to another and are made on the financial profile of the company and not necessarily on how its products relate those of other companies within its portfolio. The investor may acquire and join multiple companies.

  Examples of financial acquisitions in the library technology industry include:

  • Sale of SirsiDynix by Vista Equity Partners to ICV Partners
  • Sale of Ex Libris by Francisco Partners to Leeds Equity Partners
  • Sale of Ex Libris by Leeds Equity Partners to Golden Gate Capital

• Strategic acquisitions involve an acquisition made by a large-scale company to expand its products and services. These acquisitions center more on product synergies and access to customers and markets than the target's financial profile as a standalone company.

  Examples of strategic acquisitions in the library technology industry include:

  • Acquisition of Ex Libris by ProQuest
  • Acquisition of Innovative Interfaces by ProQuest
  • Acquisition of ProQuest by Clarivate
  • Acquisition of 3M by Bibliotheca
  • Acquisition of Infor Library Systems and Solutions by Axiell
  • Acquisition of Accessit by Follett School Solutions

The Impact of Private Equity

Private equity firms raise large-scale funds from diverse investments, which are in turn used to purchase companies to acquire companies that show promise of profitable operations and that will increase in value over time. Private equity firms tend to acquire complete ownership of a company, giving it full control in its business and product strategies. Once a private equity firm acquires a company, it will populate its board of directors with individuals that represent its financial interests. It is common for private equity firms to appoint a chief financial officer that will oversee its business interests and to ensure rigorous financial discipline. In many cases, a private equity firm will acquire multiple companies with related products or services that can be merged to achieve operational efficiencies and higher growth potential.

Private equity firms target their investments in mature and stable companies with proven capabilities in their area of business. This differs from venture capital funding more common in startup companies. When a private equity firm acquires a business, the financial arrangement often includes commitment of funds that it manages directly as well as bank loans. Loans repayments come out of the future profits of the company. These leveraged acquisitions are complex transactions assembled to meet the valuation set by the incumbent owner through a combination of investment funds and one or more lending institutions.

Private equity firms usually do not own a given company indefinitely, but will sell it after a period of five to ten years. Ownership periods can also be substantially longer, especially for companies that can sustain long-term growth.

Business strategies of private equity owners can make a major difference to the customers of its portfolio companies. A strategy based solely on increasing profits during the ownership period can result in minimal levels product development and customer support. A business strategy based on more aggressive product development to increase the long-term strategic impact of the company would likewise benefit its customers.

Private equity has played a large role in the course of the library technology industry. Many of the larger companies have been owned by private equity firms during at last part of their business history.

Some of the private equity firms that have been involved in the library technology industry include:

• Vista Equity Partners, SirsiDynix (2006-2015)
• Francisco Partners, Ex Libris
• Leeds Equity Partners, Ex Libris (2008-2012)
• One Equity Partners, Bibliotheca (2011-present)
• ICV Partners, SirsiDynix (2015 - 2022)
• Golden Gate Capital, Ex Libris 2012-2015), Infor (2005-2020)
• JMI Equity Partners, Innovative Interfaces (2012 - 2020)
• Huntsman Gay Global Equity, Innovative Interfaces (2012 -2020)
• Partners Group, Civica (2017 - present)
• 3i, Civica (2008-2017)
• KKR OverDrive (2020 - present)
• Bloom Equity Partners, Soutron (2022-present)
• CataCap, Lyngsoe Systems (2014-present)

Library Technology Vendors: Ownership Arrangements

An important question regarding the library technology industry concerns the ownership status of the organizations involved. Libraries take an interest in whether the funds that come from their ever-stressed budgets go toward product development and support, or to corporate profits. The industry includes both non-profit organizations and for-profit commercial companies. Among the commercial players, ownership arrangements include founder-owned private companies, multigenerational family businesses, those owned by private equity, and subsidiaries of publicly traded companies.

Commercial, for-profit companies

Commercial businesses are owned or controlled by shareholders, either as a privately held company or one where its shares trade through a public stock exchange. In the library technology industry, scenarios include private ownership by the individuals that established the company, those owned and controlled by private equity firms, and a those that are part of publicly owned corporations.

These companies operate to generate profits which accrue to the shareholders. Profits may be distributed to stakeholders, reinvested into the company to fund product development or expansion, or allocated to debt payments.

Founder owned businesses

A common scenario, especially for small to mid-sized companies, involves private ownership by the founders. Companies at this stage enable the founders to exercise flexibility in the operation of the company and to set its product and business strategies. Companies can operate under the ownership and management of their founders indefinitely, or they may eventually seek investors to provide capital to expand the business. Bringing in investors means some loss of control by the founders. When investors hold a minority ownership, they influence the company through representation on the company's board of directors. Once investors hold the majority of the company's equity, they likewise gain control of the board of directors and the operations of the company. It's common for founders to transition out of involvement with the company is sold outright. Founders may also continue as executives or advisors employed by the new owners.

Some of the founder-owned companies in the library technology industry include:

• The Library Corporation: co-founded by Annette Murphy in 1974.
• ByWater Solutions: founded by Brendan A. Gallagher and Nathan A. Curulla in 2009.
• Biblionix: founded by Alexander Charbonnet in 2003
• COMPanion Corporation: founded by Bill Schjelderup in 1987
• InfoVision Software founded by Bruce Elliot in 2002

Some notable transitions from founder ownership to investor control include:

• Sirsi Corporation founded by Jim Young, Jacky Young, and Mike Murdock in 1979 and sold to CEA Capital Partners in 1999.
• Innovative Interfaces: co-founded by Jerry Kline in 1978. Sold to JMI Private Equity and Huntsman Gay Global Capital in 2013
• VTLS: founded by Vinod Chachra in 1985 and sold to Innovative Interfaces in 2014

Multigenerational family businesses

Another interesting category of privately-held longstanding businesses are those where the shareholders are the descendants or family members of the founder. These stakeholders usually appoint a board of directors populated primarily of family members. In some cases, the top executives will also be descendants of the founder. These family businesses operate much like other privately held investment firms, often involved with acquiring additional companies that expand the reach of its original core business. One of the characteristics of family businesses is their tendency not to divest the companies they acquire., but to fully integrate them into their corporate infrastructure. The main examples of multigenerational family businesses in the library technology industry include EBSCO Industries and Follett Corporation.

EBSCO Information Services is the largest subsidiary business of EBSCO Industries, along with a diversified portfolio of other companies and investments. The company grew into the largest provider of general and specialized subject databases and other content products both through developing products internally and through acquisitions. EBSCO Information Services has become a key provider of technology products and services, through internal development initiatives as well as involvement in open source projects such as FOLIO.

Follett Corporation was another well-known family business oriented to libraries. Its main areas of business included library software for K-12 schools and operating physical and virtual campus bookstores. For a short period, Follett Corporation owned Baker & Taylor, the largest distributor of books and other content to public and academic libraries. Counter to the trend of non-divestment by family businesses, Follett Corporation sold off its operating companies. It sold Follett School Solutions, Baker & Taylor, and Follett Education each to different investment groups. The History of Follett Corporation including its divestments is featured in this issue of Library Technology Newsletter.

Publicly-traded companies

Another category of companies includes those traded on a public stock exchange. The usual sequence of events involves the development of an initial public offering to raise capital. If the IPO is successful, the company becomes listed on the designated stock exchange, with its shares available for purchase by interested investors. Public companies are required to file financial reports with the Securities and Exchange Commission. These filings and other official statements from the company inform potential investors regarding operational details and risk factors.

A common pathway for businesses may include launching as a founder-owned company, transitioning through one or more rounds of private equity ownership, and to eventually become a publicly traded company.

Library vendors associated with publicly traded companies include:

• Ex Libris, Innovative Interfaces, and ProQuest: all part of Clarivate.
• BiblioCommons, EnvisionWare, Softlink, PrimaSoft, Baratz, and ResourceMate: all part of Constellation Software, Inc.
• Auto-Graphics, subsidiary of Agent Information Software, Inc.

Non-profit Organizations

A number of vendors serving libraries are organized as non-profit organizations. These include OCLC, LYRASIS, and Equinox Open Library Initiative. Non-profit organizations organized under the 501(c)(3) section of the Internal Revenue Service code are not required to pay federal taxes and are required to file annual 990 forms that provide detailed financial disclosures with the IRS, which must be made available for public inspection.

Non-profit organizations do not have shareholders but are governed by a board of directors which oversee executive management. These organizations may have revenue that exceeds operating expenses. These funds are not paid to shareholders but are channeled into programs and services or held in reserve.

OCLC has a more complex business organization. It is organized as a non-profit in the United States, but its European division operates on a for-profit basis. Library services organizations do not qualify as charitable organizations in Europe.

Non-profit organizations operating as service organizations or vendors are subject to the same economic pressures as their commercial counterparts. OCLC has a long history of acquiring other non-profits as well as commercial businesses.

Ownership scenarios: technology and business trends

Among the companies in the library technology industry, no obvious connections can be discerned between the business model and qualities such as productivity, efficiency, customer support quality, or innovation. Companies under each of these business models have good records of success as well as some with uneven performance.

Among the diverse ownership arrangements, a few patterns can be discerned relative to software development models:

• None of the publicly traded companies or those owned by private equity firms offer open source products. It's not clear whether that is a quirk of the library technology industry, or if these business models favor more closely held intellectual property.
• Privately held companies and non-profit organizations are involved with a mix of open source and proprietary products. Services and products based on open source software are offered by ByWater Solutions as a founder-owned company, EBSCO Information Services as a multigenerational family business, Equinox as a non-profit, and LYRASIS as a non-profit. Though EBSCO supports FOLIO as an open source platform, most of its other products are based on proprietary technologies. OCLC, the industry' largest non-profit deals almost exclusively in proprietary software and services.

The table below describes the major companies in the library technology industry, including their business model and the type of software produced or supported.

Impact on Competition

Mergers and acquisitions have consolidated the industry, reducing the number vendors as well as ILS products. In most cases, the products of a company are retained when the company that developed it is acquired. Even when there may be long-term strategies to entice libraries to move to the products of the acquiring business, moves to force abrupt change are likely to push them to other options. In 1990 there were twenty different ILS products provided by 18 vendors implemented across the membership of the Urban Libraries Council. In 2022 there are thirteen systems provided by 10 different vendors.

See the full report which lists the products and vendors active each year between 1990 and 2022 for this group of large public libraries.

The graph illustrates the general transition from a fragmented industry to consolidation. The demise of the ILS products involved came through obsolescence more than business transitions. Many of these products were built for computing hardware, database, and operating environments that did not survive in the evolution of business technologies.