Reassessing IBM i Value: Worthless Iron or Legacy Goldmine?

March 21, 2018 Alex Woodie

In the minds of modern-day technologists, the IBM i server is relegated to the scrap bin of history, looked down upon as a vestigial organ of technology’s past with no place in the distributed future, where workloads run effortlessly on clouds and data flows seamlessly everywhere. That outlook gives the platform’s present value a low mark, but considering the recent influx of capital into IBM i ecosystem, one might want to reassess.

Trying to assess the value of something is not an easy thing to do. When looking at the worth of the entire IBM i ecosystem, or even just one independent IBM i software vendor, there would be multiple ways to tackle that equation. If the company is public, you could look at market capitalization of the stocks. Or, if you were privy to proprietary company information, you could multiply the company’s trailing 12- or 18-months sales by some multiple. If you have the number of employees, you could use general industry figures to guess at revenues. Alternatively you could put your Realtor hat on and look for “comps,” or deals for similar sized vendors that have been completed recently.

Whichever method is used, the smart guys and gals in the private equity business are surely working their spreadsheets overtime these days to come up with valuations for companies in the IBM i ecosystem. And considering some of the recent news – particularly the private equity deals done for HelpSystems and Vision Solutions – those valuations likely have green arrows next to them.

A controlling stake in HelpSystems was recently sold from one private equity firm, H.I.G. Capital, to another, HGCC. The deal was unexpected because it came less than two years after H.I.G. had taken its stake in the Eden Prairie, Minnesota, company (another deal that was also unexpected, but for different reasons).

While HelpSystems CEO Chris Heim discounted a report that said HelpSystems was a “unicorn” – or a privately held business worth more than $1 billion – he did say that the value of the company has been growing faster than the sum of its acquired parts (not to mention HelpSystems’ 7 percent organic growth across IBM i and open systems software deals, per Heim).

The source of that uptick is something that previously would have hurt the value: the company’s participation in the IBM i market.

“I think one of the reasons why the value of the company increased is there’s an increased appreciation of the IBM i among investors,” Heim told IT Jungle. “When we went out in 2015 and sold to H.I.G., we had to really explain the IBM i and what it meant and the strength of the ecosystem. And now I think there’s a greater appreciation, so we really didn’t have to spend that much time on that this time.”

The IBM i server, like the IBM System z mainframe, own unique positions in the annals of IT. They’re bound not only by a common EBCDIC data format (as opposed to the much more widely used ASCI approach), but also by an unlikely devotion on the part of their respective user bases and a reluctance to give way to new technologies just because they’re new. In an age when a user can whip up computing capacity with a couple clicks of the mouse, feed with data through stateless microservices, and then spin down the container just as quick, the fact that some folks prefer to run their businesses on physical systems that weigh 500 pounds is telling.

“Despite all the buzz about how everything is going to be cloud, I think smart investors now realize that the world is heterogeneous and it will remain heterogeneous for a long time and the IBM i has a great future,” Heim said. “I think that people understand the world is going to be heterogeneous and you need some of this larger iron to handle the heavy backend processing that the IBM i is really good at. With any new [trend] like cloud, people say it’s going to replace everything. But now I think there’s the realization that IBM i has a very critical place in the infrastructure.”

Heim may or may not have known it, but his words closely tracked what Vision Solutions CEO Nicolaas Vlok told IT Jungle last July, just after the company exchanged private equity hands and was merged with Syncsort, which plies the mainframe and big data waters.

“I think the platform is a lot more stable than what some people would make it out to be,” Vlok told us last year. “The folks who today are running it are not going to just jump to different platforms, because there’s a reason they’re running it. I think there’s a very loyal following on both of these platforms. Some of the smart investors realize that it’s a market that’s healthy and profitable. But there’s also not a lot of competition coming into it trying to disrupt it, as you’d find in other markets. And it makes for a good, probably low-risk investment with healthy returns.”

Backed by private equity, Syncsort/Vision has expanded its IBM i footprint by buying Cilasoft, a respected developer of IBM i security software. More acquisitions are expected as the company evolves its “Big Iron to Big Data” strategy ahead of its big rebranding exercise, which is expected to culminate in May.

Anytime a deal is done that involves private equity – other vendors that have received equity funding include Fresche Solutions and Rocket Software – Heim says he gets calls from private equity folks looking to do research.

“I don’t know how many people call me saying ‘We’d like to get your opinion on the IBM i marketplace,’ not realizing that I was part of the company they were doing research on,” he says. “Tons of research that everyone is doing is coming back and speaking to the longevity of the platform and the viability of it going forward.”

HelpSystems expects to complete more deals for IBM i software vendors, a strategy that has worked so far for the company and its owners. The company is looking to acquire IBM i software companies, as well as companies developing on AIX, Linux on Power, Linux on X86, Windows, and other Unix variants, he says.

Heim chuckled when asked if the increased valuations will make acquisition targets more expensive for HelpSystems.

“We think it’s a good thing for the IBM i space,” he says. “This is increased validation about the viability of the platform and the viability of the ecosystem. We think it’s a good thing for the future of software companies here, because when we acquire companies, [it means] that they’re long-term future is assured because we keep those products around, we keep enhancing them, we keep supporting them etc. We think it’s a net positive for the ecosystem.”

RELATED STORIES

HelpSystems Has A New Number One Investor

Does IBM i Need Independent Security Vendors?

Mulling Midrange Optimism

Vision Buys Enforcive, Then Gets Sold And Merged With Syncsort