In an interview with ChannelE2E, SolarWinds CEO Kevin Thompson and SolarWinds MSP President John Pagliuca shared more details about the potential spin-off of SolarWinds MSP into a separate, standalone publicly traded business.
Among the revelations: If a SolarWinds MSP spin-off occurs...
- The existing SolarWinds MSP executive team would run the spun-off business.
- The potential spin-off is not an attempt to sell the business to another buyer or suitor.
- Existing SolarWinds ownership (including private equity firms Thoma Bravo and Silver Lake, plus $SWI shareholders) would own the spun-off SolarWinds MSP company.
- SolarWinds MSP would continue to focus purely on MSP partners in the SMB market.
Kevin Thompson and John Pagliuca: The Interview
ChannelE2E has paraphrased highlights from the conversation below. Again, paraphrased...
ChannelE2E: What's driving SolarWinds to explore the potential MSP software business spin-off?
Thompson: SolarWinds' core IT management business is about a $700 million revenue business for 2020. The sister MSP business, led by Pagliuca, will approach $300 million for 2020. The goal: SolarWinds is exploring ways to optimize the business opportunity for both businesses. United as a single business, for instance, there are certain moves that SolarWinds may not explore for the MSP business because the proposed MSP software moves don't have a huge impact on the overall, combined SolarWinds business. But separated into two businesses, there are steps Pagliuca can make that move the needle more quickly for SolarWinds MSP -- without the constraints that come with being part of an enterprise company. Through a spin-off, the SolarWinds MSP business could be freed up to focus on driving growth rather than making profit the key priority.
SolarWinds believes the MSP business can generate 20 percent growth or greater for a number of years ahead. Also, there's an opportunity for SolarWinds MSP as a standalone company to pursue the Rule of 50.
Background from ChannelE2E -- Rule of 50 Explained:
- A strong SaaS business typically has a Rule of 40 growth rate -- basically, your business growth rate plus your profit margin. If you're growing at 20 percent, you should be generating 20 percent profit (20+20) to achieve that Rule of 40. Similarly, if you're growing at 30 percent, you should be generating 10 percent profit (30+10) to achieve the Rule of 40.
- Thompson's math is even more aggressive. He believes the SolarWinds MSP business can potentially deliver a Rule of 50 outcome -- where a combination of profit margin plus growth rate equals 50, rather than the more familiar target of 40.
ChannelE2E: What's the timing for a potential spin-off?
Thompson: Perhaps in the first six months of calendar 2021. The company needs to closely identify where the two businesses leverage common systems, processes and talent, and then explore how those operations would function if SolarWinds MSP was a standalone business.
ChannelE2E: Is SolarWinds doing this as a potential test balloon to attract bids and potentially sell SolarWinds MSP to another company?
Thompson: That’s not the case. If we proceed with the spin-off, we’re committed to running both businesses as separate, publicly traded companies. We still think the MSP market is in its early days. This is not an attempt to get either business (Solarwinds corporate or SolarWinds MSP) acquired. We think we can create two really successful companies.
ChannelE2E: Refresh my memory. How much of SolarWinds is private equity-owned, and how much is publicly held ($SWI)? And what does the potential ownership model look like for SolarWinds MSP as a separate, standalone company?
Thompson: Together, Thoma Bravo and Silver Lake own roughly 85 percent of SolarWinds. The other 15 percent of SolarWinds involves publicly owned stock. The private equity firms and SolarWinds' public shareholders would own shares in the SolarWinds MSP spin-off. But this is not about unlocking a valuation of one business or the other business. It's about optimizing the performance of two businesses.
ChannelE2E: Who would run SolarWinds MSP if it spins-off into a standalone, publicly traded business?
Thompson: John (Pagliuca, currently president of SolarWinds MSP).
ChannelE2E: John, do you have the right executive team in place to run SolarWinds MSP as a standalone business?
Pagliuca: SolarWinds MSP has the right business leaders. The team has hundreds of years of actual experience in the MSP space. We will look to augment our team where we need some public company experience.
Thompson: No one on the SolarWinds MSP team will go away.
ChannelE2E: So what does the journey look like for you, John, as SolarWinds MSP explores the potential spin-off?
Pagliuca: I think "journey" is the right word. And the journey is continuing. Kevin had the foresight in 2013 to have SolarWinds acquire N-able in 2013. And SolarWinds has built the MSP organization into a $300 million business. We will figure out the right moves in terms of prioritizing our investments, R&D, M&A and more. For me and my time, prioritizing becomes much more simple if we're a standalone company. Either way, we will continue to do right by MSPs.
Thompson: Let me give you an example on how SolarWinds MSP could move as an independent company. There are a lot of good point products in the MSP market. But they're products -- not companies -- that will generate $3 million to $7 million on their own. As a standalone company, SolarWinds MSP would have the autonomy to go and acquire those types of products much more readily.
And in terms of what the spin-off evaluation process looks like for the next few months, we'll closely look at the set of resources John would need dedicated to the SolarWinds MSP business. Where would we share near-term, where would we hire? We'll explore answers to questions like those.
ChannelE2E: Come to think of it, there isn't a pure-play, publicly held MSP technology company yet.
Thompson: It's time for that, don't you think? It could be us with SolarWinds MSP. Or it could be Datto. We'll see.
