Who Will Acquire Open Text (OTEX)?

Open Text (Nasdaq: OTEX), a provider of enterprise management software, is being seen as a potential takeover target for one of its partners, according to a report in BusinessWeek.

The magazine, in Gene Marcial's Inside Wall Street column, citing Richard Parower, an analyst with Seligman Investments, and other analysts, reported that the company could become a takeover target for SAP, Microsoft or Oracle, all of whom partner with Open Text. The Waterloo, Ontario-based company has a market capitalization of USD 2.2bn. Open text recently bought Vignette in an effort to consolidate the ECM industry while trying to reach a $1B mark as the last standing independent supplier. In my opinion, SAP would make it virtually impossible to let Open Text snapped up by a competitor.

Five Technologies That Could Change Everything

It's a tall order: Over the next few decades, the world will need to wean itself from dependence on fossil fuels and drastically reduce greenhouse gases. Current technology will take us only so far; major breakthroughs are required.

What might those breakthroughs be? Here's a look at five technologies that, if successful, could radically change the world energy picture.

They present enormous opportunities. The ability to tap power from space, for instance, could jump-start whole new industries. Technology that can trap and store carbon dioxide from coal-fired plants would rejuvenate older ones.

Success isn't assured, of course. The technologies present difficult engineering challenges, and some require big scientific leaps in lab-created materials or genetically modified plants. And innovations have to be delivered at a cost that doesn't make energy much more expensive. If all of that can be done, any one of these technologies could be a game-changer.

SPACE-BASED SOLAR POWER

For more than three decades, visionaries have imagined tapping solar power where the sun always shines—in space. If we could place giant solar panels in orbit around the Earth, and beam even a fraction of the available energy back to Earth, they could deliver nonstop electricity to any place on the planet.

The technology may sound like science fiction, but it's simple: Solar panels in orbit about 22,000 miles up beam energy in the form of microwaves to earth, where it's turned into electricity and plugged into the grid. (The low-powered beams are considered safe.) A ground receiving station a mile in diameter could deliver about 1,000 megawatts—enough to power on average about 1,000 U.S. homes.

The cost of sending solar collectors into space is the biggest obstacle, so it's necessary to design a system lightweight enough to require only a few launches. A handful of countries and companies aim to deliver space-based power as early as a decade from now.

ADVANCED CAR BATTERIES

Electrifying vehicles could slash petroleum use and help clean the air (if electric power shifts to low-carbon fuels like wind or nuclear). But it's going to take better batteries.

Lithium-ion batteries, common in laptops, are favored for next-generation plug-in hybrids and electric vehicles. They're more powerful than other auto batteries, but they're expensive and still don't go far on a charge; the Chevy Volt, a plug-in hybrid coming next year, can run about 40 miles on batteries alone. Ideally, electric cars will get closer to 400 miles on a charge. While improvements are possible, lithium-ion's potential is limited.

One alternative, lithium-air, promises 10 times the performance of lithium-ion batteries and could deliver about the same amount of energy, pound for pound, as gasoline. A lithium-air battery pulls oxygen from the air for its charge, so the device can be smaller and more lightweight. A handful of labs are working on the technology, but scientists think that without a breakthrough they could be a decade away from commercialization.

UTILITY STORAGE

Everybody's rooting for wind and solar power. How could you not? But wind and solar are use-it-or-lose-it resources. To make any kind of difference, they need better storage.

Scientists are attacking the problem from a host of angles—all of which are still problematic. One, for instance, uses power produced when the wind is blowing to compress air in underground chambers; the air is fed into gas-fired turbines to make them run more efficiently. One of the obstacles: finding big, usable, underground caverns.

Similarly, giant batteries can absorb wind energy for later use, but some existing technologies are expensive, and others aren't very efficient. While researchers are looking at new materials to improve performance, giant technical leaps aren't likely.

Lithium-ion technology may hold the greatest promise for grid storage, where it doesn't have as many limitations as for autos. As performance improves and prices come down, utilities could distribute small, powerful lithium-ion batteries around the edge of the grid, closer to customers. There, they could store excess power from renewables and help smooth small fluctuations in power, making the grid more efficient and reducing the need for backup fossil-fuel plants. And utilities can piggy-back on research efforts for vehicle batteries.

CARBON CAPTURE AND STORAGE

Keeping coal as an abundant source of power means slashing the amount of carbon dioxide it produces. That could mean new, more efficient power plants. But trapping C02 from existing plants—about two billion tons a year—would be the real game-changer.

Techniques for modest-scale CO2 capture exist, but applying them to big power plants would reduce the plants' output by a third and double the cost of producing power. So scientists are looking into experimental technologies that could cut emissions by 90% while limiting cost increases.

Nearly all are in the early stages, and it's too early to tell which method will win out. One promising technique burns coal and purified oxygen in the form of a metal oxide, rather than air; this produces an easier-to-capture concentrated stream of CO2 with little loss of plant efficiency. The technology has been demonstrated in small-scale pilots, and will be tried in a one-megawatt test plant next year. But it might not be ready for commercial use until 2020.

NEXT-GENERATION BIOFUELS

One way to wean ourselves from oil is to come up with renewable sources of transportation fuel. That means a new generation of biofuels made from nonfood crops.

Researchers are devising ways to turn lumber and crop wastes, garbage and inedible perennials like switchgrass into competitively priced fuels. But the most promising next-generation biofuel comes from algae.

Algae grow fast, consume carbon dioxide and can generate more than 5,000 gallons a year per acre of biofuel, compared with 350 gallons a year for corn-based ethanol. Algae-based fuel can be added directly into existing refining and distribution systems; in theory, the U.S. could produce enough of it to meet all of the nation's transportation needs.

But it's early. Dozens of companies have begun pilot projects and small-scale production. But producing algae biofuels in quantity means finding reliable sources of inexpensive nutrients and water, managing pathogens that could reduce yield, and developing and cultivating the most productive algae strains.

You can read this article at today’s WSJ.

Anti-Cancer: A New Way of Life

This weekend, I have finished reading a new book – Anti-Cancer: A New Way of Life. It talks about the story of David Servan-Schreiber, a dedicated scientist and doctor, whose life changed when diagnosed with brain cancer. Confronting what medicine knows about the illness and the little-known workings of his body’s natural cancer-fighting capabilities, and marshaling his own will to live, Servan-Schreiber found himself on a fifteen-year journey from disease and relapse into scientific exploration and, finally, to health. Combining memoir, concise explanation of what makes cancer cells thrive and what inhibits them, and drawing on both conventional and alternative ways to slow and prevent cancer, Anticancer is revolutionary.

It is a moving story of a doctor’s inner and outer search for balance; radical in its discussion of the environment, lifestyle, and trauma; and compelling and cautionary in its proposal that cancer cells lie dormant in all of us—and that we all must care for the “terrain” in which they exist.

Advocating a sea change in the way we understand and confront cancer, Anticancer is a radical synthesis of science and personal experience, an inspiring personal journey, and certainly a guide to “a new way of life.”

Anticancer tells us:

• Why the traditional Western diet creates the conditions for disease and how to develop a science-based anticancer diet
• How and why sugar and stress feed cancer—and ways to achieve life balance and good nutrition to combat it
• Why the effects of helplessness and unhealed wounds affect our ability to restore health
• How to reap the benefits of exercise, yoga, and meditation
• How to minimize environmental toxins
• How to find the right blend of traditional and alternative health care

Please find the author’s blog on:

http://anticancerbook.com/

You can purchase the book on amazon.com:

http://www.amazon.com/Anticancer-New-Life-David-Servan-Schreiber/dp/0670020346/ref=sr_1_1?ie=UTF8&s=books&qid=1255292933&sr=8-1

Ursula’s Big Bet on Services to Transform Xerox, Again

As I have worked with Ursula during my tenure at Xerox, I must admit how bold and tough-minded she can be. I am not surprised at all with her $6.4 billion deal to buy Affiliated Computer Services that is clearly intended to accelerate the transformation of Xerox into a services provider. We have tried to transform the firm into services by xeroxing what IBM had accomplished with Lou Gerstner and Rick Thoman in 1999 which has brought the company into bankruptcy.

There will be two key value drivers: drive ACS sales outside the US and replace manual /offshore ACS services with Xerox PARC IP and technologies in digital content and document management and workflow management, both of which will be a major challenge.

I know a great deal about ACS through my connections and business dealings with them. It is worth mentioning that after an in-depth analysis of the services landscape, I had passionately proposed the acquisition of ACS to Tom Dolan while back in 2004 when I was heading up Business Development Operations for Xerox Global Services as part of the Smart Document Services Strategy that I had co-formulated and published in the annual report. Unfortunately, it took six years and Ursula to become the CEO to finally do it…In my next post, I will publish a detailed assessment of the acquisition, its opportunities and challenges ahead.

Below, I am posting a copy of BusinessWeek article on the news:

http://www.businessweek.com/print/technology/content/sep2009/tc20090928_981471.htm

Given its reliance on hardware, Xerox got squeezed by the recession as companies stretched equipment further and put off purchases of new printers and copiers. The company's bold expansion into services, through the $6.4 billion acquisition of Affiliated Computer Services announced on Sept. 28, represents an attempt to capitalize on the global recovery.

Buying ACS will triple Xerox's services revenues, to $10 billion, and help it benefit from companies' desire to do more with fewer workers, even as business comes back. ACS, which handles paper-oriented tasks such as billing and claims processing for governments and private companies, also gives Xerox a bigger toehold in health-care and government services, two areas primed to benefit from federal economic stimulus spending.

Xerox Chief Executive Ursula Burns says the company needed to make a large services acquisition to accelerate its transformation from a product company into a service provider. "The way we were going was going to take 10 years," she said in an interview. "The path we were on wouldn't have given us scale fast enough."

TAKING A PAGE FROM BIG BLUE

Other technology firms are taking a page from IBM, betting on services as a way to bring in steady revenues at a time when customers are keeping computers and other equipment longer to save money. Xerox's cash-and-stock bid for ACS represented a 34% premium to ACS's closing stock price on Sept. 25. It came a week after Dell said it's paying $3.9 billion for information technology services company Perot Systems, offering a 68% premium. Hewlett-Packard bought tech services company EDS for $13.9 billion in 2008. "Everyone is looking at the IBM model and trying to emulate it," says Eric Gebaide, a managing director at investment bank Innovation Advisors.

Burns, who pulled the trigger on Xerox's biggest-ever acquisition after less than three months as CEO , will need to prove to investors that Xerox's latest push to diversify beyond hardware will succeed better than failed attempts a decade ago. Rick Thoman, CEO in 1999 and 2000, led an expansion into inkjet printing, Xerox-developed software, and document management services, with disastrous results.

Then, Anne Mulcahy, who was chief executive from 2001 until this summer, pulled the company back from the precipice of bankruptcy and restored profitability by concentrating on core areas, including color and commercial printing. "Their strategy has waxed and waned based on the stock price," says Peter Falvey, a managing director at investment bank Revolution Partners, a division ofMorgan Keegan & Co., who advised Xerox on a services company acquisition in 2006. "They've tried to get into ancillary markets with mixed success."

FACING A TOUGH ENVIRONMENT

Burns says past attempts by Xerox to expand beyond selling printers, copiers, and the supplies that feed them ran into trouble because of management missteps, not a misplaced strategy. "If we had a problem in the Thoman era, it was about implementation, not the goals," says Burns, who started at Xerox as an intern in 1980 and became vice-president for worldwide manufacturing in 1999.

The company made changes without having new, replacement procedures in place, she says. For instance, the company pared 38 customer billing centers down to three in a bid to lower costs and improve quality, but lost control of collecting money owed to it. "It's just my humble opinion that this was not good management," Burns says. "We had to recover from that."

To be sure, Xerox is still facing a tough environment. Sales this year are expected to decline 16%, to $14.8 billion, and profits in the quarter that ended June 30 dropped 35%, to $140 million. Last October, Xerox laid off 3,000 workers, or 5% of its staff. But Burns says several years of improved earnings and cash flow have left the company better able to make acquisitions.

ACS: MEDICARE CLAIMS PROCESSOR

Xerox was already expanding, albeit modestly, in services. It bought a company called Amici in 2006 for $174 million to enter the business of helping lawyers organize digital documents during legal discovery. The following year it bought Advectis, which helps banks and consumers electronically manage mortgage documents, for $32 million. With ACS, "they're trying to buy revenue, certainly," says Revolution Partners' Falvey. "But the overall thesis is [Xerox] really wants to transform into a services-based business."

ACS's sales increased 6%, to $6.5 billion, for its fiscal year ended June 30. It's one of the largest processors of Medicare claims, along with HP's EDS unit. "There's no doubt it's good news that they're critical to health-care IT. This is where the money is being spent," says Burns. ACS, which tried to sell itself two years ago to private equity firm Cerberus Capital Management before the deal fell through, had been anticipated by bankers again this year to be an acquisition candidate.

By selling more consulting and outsourcing services, hardware companies like Xerox and Dell hope to counteract declining hardware revenues. Corporate purchases of copiers and printers are expected to remain flat for the foreseeable future, and worldwide PC sales are expected to decline 2% in 2009, according to market researcher Gartner (IT). Meanwhile, sales of IT services grew 8.2% in 2008 to $806 billion. Services contracts can tie customers to vendors for longer periods of time than hardware sales can, says Dane Anderson, a Gartner analyst.

BEHIND E-ZPASS, TOO

Investors are also starting to reward technology companies that diversify as a way to guard revenues during downturns, says banker Gebaide. "We've been in a world where specialty plays have been the pinnacle of how companies are analyzed," he says, referring to the tendency to focus narrowly on given markets or product lines. Now, companies that combine hardware, software, and services "will have a lot more places to be protected."

So far, Xerox's role in the so-called business process outsourcing market has been minimal. Of the company's $3.5 billion in annual services revenue, $3.2 billion came from maintaining and managing printers and other office machines, according to Burns. About $300 million has been from "more advanced" process outsourcing services akin to what ACS does.

Burns' bet is that Xerox can apply its globally recognized brand and worldwide sales presence to expand ACS into Britain, Germany, Spain, and other parts of the world. About 92% of the Dallas-based company's revenues come from the U.S. "The rest of the world doesn't even know who ACS is," she says. Xerox also plans to use its technology for computerized scanning and organization of documents to improve such ACS tasks as operating the E-ZPass automated toll system, or processing insurance paperwork.

DEALMAKING FRENZY

Xerox expects to save $300 million to $400 million in the first three years after the deal closes in the first quarter of 2010, and said the deal will add to profits in the first year after it's completed. On Sept. 28, shares of Xerox closed down 1.30, or 14.4%, at 7.68. ACS shares gained 6.61, or 14%, to close at 53.86.

Xerox's ACS buyout arrives amid a flurry of post-Labor Day dealmaking. In technology, Adobe Systems (ADBE), Intuit (INTU), and Google (GOOG) each announced acquisitions this month. In pharmaceuticals, Abbott Labs (ABT) said on Sept. 21 it would acquire the drug and vaccine business of Belgian chemical company Solvay for $6.6 billion.

Burns and her team at Xerox aren't known as dealmakers, and bankers point out that the company will likely have its hands full folding in ACS, which has 74,000 employees, compared with Xerox's 54,000. Burns argues that Xerox plans to run ACS as a standalone business, and can eliminate people from its processes. "It won't be tough at all because we have no intention of integrating it," she says.

Xerox, an icon of American business whose name is synonymous with photocopying, has been making a slow climb back from its nadir in 2001. If the company finally hopes to prove to investors that it's retooling for the Digital Age, it will need to diversify much more carefully than the last time it tried expanding beyond its bread-and-butter business.

Consolidation in the Enterprise Content Management Industry - Who Will Be Next - Autonomy or Open Text? Part I

Since my old company, Document Sciences was bought by EMC, I have been following the Enterprise Content Management market closely; The Fortune 500 have invested billions of dollars in databases and ERP technologies leading to multi-billion dollar franchises such as Oracle, SAP etc. focused on the structured data world. However, the next frontier of productivity will come from the unstructured data that includes your emails, you-tube videos, word document, power point presentations, pictures etc. According to various industry researches, unstructured data accounts for over 80% of corporate information. There are many technologies and tools aimed at finding, storing and managing the unstructured data which has been gaining traction such as enterprise content management, enterprise search, information access, business intelligence to name a few. The Enterprise Content Management (ECM) market for example is about $3.8B growing in low double digits. Thanks to these ECM technologies CIOs now can bridge the structured and the unstructured data to create a Unified Information World (UIW) which can help drive significant productivity gains for knowledge workers. Large IT vendors – IBM, EMC, and Oracle – have been acquiring ECM companies to capitalize on the UIW for some time. For example, EMC bought Document, Legato, Captiva and my old company Document Sciences.

There are two largest, independent ECM vendors – Autonomy and Open Text – consolidating the market trying to reach the billion-dollar mark while also competing with the upcoming versions of Share Point by Microsoft. Microsoft Windows SharePoint Services (WSS) provides rudimentary DM functionality, available with Windows Server at no additional cost. This no-cost option has generated

widespread experimentation with WSS as a DM solution. Commoditization at the low-end of the ECM market by Microsoft has forced my traditional ECM vendors to move toward solutions and industry-specific offerings. Having been a Chief Marketing Officer in the industry, I can honestly say that most of these vendors and their founding CEOs don’t have any interest or appreciation or competency in vertical solutions. Most of them are deeply in love with their technologies proudly broadcasting their specs to CIOs, which don’t really care much about it.

Autonomy, the undisputable technology king of the enterprise search sector has recently bought Interwoven, an ECM vendor for $775M. I already published a detailed analysis on the acquisition and its likely impact on the future of the industry. They have an end-to-end platform to pursue new applications such as meaning-based marketing (Interwoven’s deep strengths in Web content management (WCM) through TeamSite product) and legal and compliance management (Interwoven WorkSite, which according to Forrester is the best-kept secret in document management). Interwoven had merged with iManage, a provider of collaborative document management products, in late 2003. iManage provided Interwoven with not only document management (DM) products but more than 1,300 customers and a strong installed base in law firms. Now Autonomy will target iManage client base with a great value proposition of a more powerful search engine front-end – The Intelligent Data Operating Layer IDOL.

Regulatory is still significant driver in all sectors, including pharmaceuticals, manufacturing, professional services, media and technology leading to Fortune 500 deploying capabilities in archiving, eDiscovery, and information governance. As Regulators keep promising hard hitting new rules and hefty sanctions coupled with increased complexity of rules across multiple jurisdictions, I don’t expect slow-down in sales cycles or pricing or margin pressure.

Accordingly, Autonomy makes an excellent acquisition target due to:

• Attractive profitable revenue run-rate of around $800M
• Superior technology platform that can fill-in gaps of many large IT vendors’ stacks
• Ability to cross-sell into Interwoven and Autonomy blue-chip client bases
• Track-record in selling robust vertical applications and solutions into the enterprise
• Autonomy is the only remaining large independent player after Open Text.

In my opinion, SAP and Microsoft would be most interested in acquiring Autonomy. Microsoft has never made any acquisitions of this size in the past but they had never laid people off or announced the amount of loss as in the last quarter. Autonomy is just too close to Microsoft’s heartland and provides a powerful value proposition to Fortune 500 clients while also marginalizing Google.

SAP on the other hand said ECM would be next in their shopping list following the Business Object acquisition but they are known to have slow, bureaucratic culture. Given their Enterprise Search product is already late, Autonomy’s IDOL product would be a fantastic alternative. We should however never rule out a competitive bid by IBM, HP, Oracle and EMC.

In my next analysis due later this week, I will continue the discussion with Open Text. It is worth noting that in my analysis dated January 31, 2009, I had predicted that Open Text would buy Vignette, which they did in May.

What Private Equity Should Learn from Conglomerates

I was reading a Fortune article talking about why private equity is in deep freeze given the recession. I tend to think it has more to do with how most of these firms are used to operating than the economy itself. For the first time in a long time, they need to manage the firms that they got with a longer-term perspective on the fundamentals of the business in terms of sustainable profitable growth as opposed to high-leverage / quick-exit / high-multiple approach. They also need to learn to work with the existing management teams with more emphasis on human capital development. I now several great executives who quit their firms following the acquisition by a private equity firm. PE firms must also focus on creating more synergies (e.g. procurement, centralized cross-selling/CRM etc.) among their portfolio companies.

Buyout firms with huge stockpiles of cash aren't making new deals. The reason? They're too focused on trying to manage the companies they've already got.

NEW YORK (Fortune) -- If the credit markets have been an iceberg over the past year, the private equity business has been frozen as solid as a prehistoric glacier. Buyout giants like KKR, Blackstone, and Bain Capital -- who just a couple of years ago were vying to one-up each other on a monthly basis with new mega-deals -- have been in a virtual hibernation for months.

In the first half of 2009, just $24 billion in deals were completed globally. That compares to $131 billion last year and an astounding $528 billion in deal volume in 2007. This year's first-half total is the lowest since 1996, when the buyout industry was much smaller. There were only three loans extended to fund leveraged buyouts through June, the fewest number since 1985 according to Dealogic.

In recent weeks, though, the stock market has begun to rally and the cost of borrowing has begun to fall. So it's natural to wonder: Is the buyout market about to heat up again?

Don't be on it, say industry insiders. Private equity is still in the early stages of a long thaw.

Digesting last cycle's deals

The problem is not that firms don't have money to spend. In fact, according to private equity research firm PitchBook, the industry is sitting on an estimated $400 billion worth of so-called dry powder, or money raised but not yet invested.

No, the reason that dealmaking isn't going to come roaring back is that private-equity firms are simply still too busy trying to digest the companies they swallowed during the boom years.

"The business has changed radically," says John Howard, head of Irving Place Capital, the former Bear Stearns Merchant Banking unit, which he helped rescue from the wreckage of Bear. "What was essentially a business of creating financial options is becoming more concerned with growth and enhancing profitability."

A survey earlier this year by the Association for Corporate Growth, a buyout industry group for consultants, found that 89% of private-equity executives said they were planning on spending a lot more time than before focusing on their portfolio companies.

Of course, private equity investors have always claimed that their business was all about "improving" the companies they buy through streamlining operations. (At least enough to service the huge debt loads they pile on in the acquisition.)

But in reality, the velocity of the business -- fueled by cheap debt to buy companies and hungry equity markets to resell them to -- typically discouraged much more than blunt-force cost-cutting. Only the very biggest firms have ever paid much attention to teaching management skills or thinking about ways to share costs among portfolio companies.

"We saw people talk a lot about building platforms," says Andrew Wilson, managing partner in divestiture services at Deloitte & Touche, referring to the industry's term for buying companies and working to combine them in creative ways. "But we didn't see so many execute them."

Despite the stock market's rally, firms don't expect much demand for their holdings any time soon. Part of the reason is that newly skeptical investors wouldn't think about investing in the debt-laden companies they own. According to Standard and Poor's, an astonishing half of all defaulting companies this year as of June were owned by private-equity firms.

"The environment has changed, and the holding period is expected to be a lot longer," says Blackstone's senior managing director in charge of portfolio management, James Quella. "The ability to use financial engineering for enhancing returns has been curtailed and limited on existing portfolios."

A survey by Coller Capital, which invests in stakes in private equity deals, found that two-thirds of people in the industry believe the environment will stay the same or even get worse next year.

Learning to manage

So in an attempt to generate some kind of returns for their investors in that time, firms are turning more aggressively to the time-honored tradition of creating value through cost savings. Such savings are being achieved by running their portfolio companies more like divisions of a parent, cutting costs across businesses and getting all the top managements in a room together more often.

It's an ironic turn of events, given that the earliest private equity deals were a response to the conglomerate booms of the 1960s and '70s, when bloated, unmanageable behemoths like Gulf + Western and ITT were built.

Gary Stibel, founder and CEO of the New England Consulting Group, has been working with private-equity firms since those days. "Traditionally, firms delegated that kind of management stuff to advisory partners, or just didn't really pay much attention," he says. "Now they're focusing on it and doing it more themselves."

One increasingly popular practice is called "leveraged sourcing," in which the many companies owned by a firm will pool their buying orders from suppliers -- ranging from telecom services to temp workers -- to get bigger bulk discounts.

"We're getting a ton of phone calls on this," says Richard Jenkins, a managing director at turnaround advisory firm Alvarez & Marsal, which recently launched a group dedicated to private-equity consulting. "Each week, we get another two or three calls asking us about what they can do to cut costs and manage more centrally."

Even mega firms that have done this in some form in the past are expanding. Blackstone has long had a group, called CoreTrust, that purchases across its businesses. It is the single largest U.S. customer to Staples for example.

Quella recently led Blackstone into a new area for leveraged sourcing: health care. Since January, Blackstone has asked companies to participate in a group plan that is now Aetna's fifth-largest and Anthem's ninth-largest customer. The health group also runs prevention and wellness programs across its companies.

Still about selling

There are limits to the process, however. Not all business functions can be merged. Howard of Irving Place Capital says that advertising in particular is a touchy area.

"I've learned from the experience of buying an ad agency to use for all the businesses," he says, "For the head of marketing, choosing an agency is one of their most important decisions. It was emasculating to them."

Will cost savings single-handedly save private equity's returns? Consider that Blackstone's two most recent funds raised nearly $30 billion. A 10% reduction in health-care costs of $2 billion would save $200 million, or create about $1.4 billion in value, assuming they can sell the companies for seven times their earnings. Using some rough, unscientific math, that's about a 5% return on those funds.

So while private-equity firms may make a virtue of their focus on growth, it is still the selling of those assets -- not the managing of them -- that defines them.

"Private equity will always be the business of selling companies," says Stibel. "Exit timing and strategy is significantly more important for overall returns. More important than even the companies." Meanwhile, they have to manage the best they can.