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Innovative Interfaces Joins the Private Equity Club

Submitted by Marshall Breeding on March 1, 2012 - 12:37pm

Innovative Interfaces, one of the veteran companies of the library automation industry, has been one of the major hold-outs in the wave of private equity investments that has reshaped the library automation industry over the last six years.  The company has remained under the sole ownership of its co-founder Jerry Kline.  That position now changes as a pair of private equity firms, Huntsman Gay Global Capital and JMI Equity have made strategic investments in Innovative Interfaces, Inc. and its sister company SkyRiver Technology Solutions.  Following the transaction Kline retains partial equity in the company and will serve as the Chairman of the company’s reconstituted Board of Directors and will continue involvement in the leadership of the company.  Rich Lawson, co-founder and Managing Partner of Huntsman Gay serves as Vice Chairman and JMI Equity will hold a seat on the new Board.  No changes in the executive management of Innovative or SkyRiver are planned. 

While the move involves a substantial change of ownership in Innovative Interfaces, it does not point toward further consolidation of the industry.  Both Huntsman Gay and JMI Equity invest primarily in North American companies across a variety of industries. JMI Equity focuses its investments on companies involved in software development, internet services, health care IT, and business services.  Neither company has current investments in companies directly or indirectly related to the library automation industry. 

Transaction Details

The specific terms of the transaction have not been disclosed.  Both Huntsman Gay and JMI Equity both come to the table with substantial capital resources.  Huntsman Gay, with a fund of 1.1 billion, typically makes investments in the $25-100 million range; JMI Equity manages a fund of 2.1 billion in committed capital and makes investments ranging from $10-100 million.  This type of transaction involving multiple private firms to gain a controlling interest in a company is relatively common arrangement, often termed a “club deal,” but has not been previously seen in the library automation industry.  Whether joined in partnerships or as sole investors, private equity companies do not engage with companies without sufficient control to execute strategies to protect and grow their investments. 

The Latest in a Series of Private Equity Deals

Private equity investment is nothing new to the library automation industry.  Most of the large companies are already under private equity ownership including SirsiDynix, Ex Libris Group, Civica, Infor, and Bibliotheca Group.  But this transaction stands apart from others seen in the library automation industry.  In the preceding acquisitions, a single private equity firm has taken full ownership of one or more companies: 

  • Vista Equity Partners acquired complete ownership of SirsiDynix in 2006.  The consolidation of Sirsi Corporation and Dynix happened took place previously in June 2005 during the period when Seaport Capitol owned Sirsi Corporation.
  • Francisco Partners purchased both Ex Libris and Endeavor Information Systems in 2006.  Leeds Equity Partners acquired the consolidate Ex Libris Group in August 2008.
  • Civica was acquired in May 2008 by 3i Investments.
  • In the library RFID arena, One Equity Partners, a division of JP Morgan Chase & Co. acquired the Swiss company Bibliotheca RFID, UK-based Intellident, and US-based ITG to form Bibliotheca Group, a new global company.

The retention of partial ownership by Kline differs from these previous deals.  This arrangement places the insight and experience of the company’s longstanding owner and strategist in the mix along with any perspectives brought in by the new investors. 

While private equity dominates the largest library automation companies, other ownership arrangements exist among the mid-sized players.  Auto-Graphics, a wholly owned subsidiary of Agent Information Software, Inc. (AIFS.PK) is the only publicly traded company.  Polaris Library Systems is owned by an investment led by its management.  VTLS remains under the ownership of its founder Vinod Chachra. OCLC is a non-profit organization owned by its membership.

Business as Usual at Innovative

Kline states that Innovative will continue to conduct “business as usual” and that this change will not alter the company’s commitment to its library customers.  The existing management team will remain in place.  Neil Block has led the Innovative Interfaces as its President since August 2010 as Kline stepped aside from the daily management of the company and will continue in this capacity following the transaction along with his management team. The workforce of the company will remain intact.

Why now?

Although Kline has resisted bringing in outside investors, he states “this as an ideal time to bring in new stakeholders with vested interests in growing the company. I’m glad to be able to share the responsibility with new partners that will participate in decisions that impact our library customers.”
This transition comes at a time where Innovative is poised to deliver the next generation of its strategic automation product.  In May of 2011 Innovative announced its new Sierra library services platform.   Though still in development but slated for release later this year, Innovative was successful in recruiting a substantial portion of its Millennium customer sites to sign contracts as early implementers of Sierra.  This surge of sales stands as a strong vote of confidence from its library customers in vision that Innovative has projected for Sierra.  The more open approach to technology embodied in Sierra’s design apparently struck a positive chord. 

The interest of private equity firms in Innovative Interfaces should be taken as a mark of the strength of the company, not that it is a weak position.   While venture capital firms may invest in start-ups or other more risky ventures, private equity firms seek mature and stable companies with potential for significant growth over time.  Private equity firms tend to maintain their investments in a company for 5-7 years. 

Position in the Industry

Innovative ranks as the third largest company in the library automation industry with annual revenues estimated at just under $90 million.  The company employs over 300 personnel.  Over 1,400 installations of its Millennium ILS serve over 4,500 libraries in over 50 countries.  Innovative does about a third of its business outside the United States.  The company has a broad array of products, serves a diverse mix of library types, and is involved in many geographic regions worldwide.

Throughout its long history, the company has seen a steadily growing base of library customers.  Although in recent years Innovative has lost some Millennium sites to open source projects, its inflow of new customers have outpaced any leakage.  While open source alternatives will continue to pose a challenge to Innovative, the open design of its new-generation Sierra platform may help abate future losses and attract new library customers.

In addition to its flagship Millennium ILS, Innovative offers a variety of other products, including the Electronic Resource Management application, the Encore Synergy discovery service, the WebBridge LR link resolver, a digital asset management system called Content Pro, the AirPAC products for mobile devices, and the INN-Reach and ArticleReach resource sharing environments.  Innovative’s products have been implemented in all types of libraries.  In addition to large numbers of academic and public libraries, Millennium has been implemented in many school districts and special libraries, especially in the legal sector.     

SkyRiver’s Status

SkyRiver, a much smaller company, will operate under the same new ownership arrangements as Innovative.  Since its founding in September 2009, the company has steadily grown the number of libraries subscribing to its bibliographic services.  The company recently announced it has reached 50 installations representing over 350 libraries. Leslie Straus continues as President of SkyRiver. 
The lawsuit initiated by SkyRiver and Innovative in July 2010 challenging OCLC remains unsettled, stalled since April 14 pending a judicial ruling.

Corporate History

The history of Innovative has been one of steady organic growth with minimal activity in mergers and acquisitions and has until now operated on its own revenues without external investors.  Unlike its peers in the top of the library automation industry, the benchmarks of its history lie more in the new products and technologies it has created than with business transitions. 

Innovative Interfaces was founded by Jerry Kline, Steve Silberstein, and Lachmann Sippy in 1978.  Sippy’s involvement with the company was short-lived.  The company has followed a steady upward trajectory from its beginnings in a spare room in Kline’s Berkeley, CA home. 

Innovative was managed jointly by the remaining co-founders through 2001 when Kline became the sole owner of the company, buying out the interests of Silberstein. 

The company’s original product was a “black box” that allowed libraries using the CLSI circulation system to connect to OCLC for cataloging records. This type of system-to-system interconnection was not common at this time of proprietary hardware, operating systems, and software, with no standardized communications protocols. 

1982 saw the development of INNOVAQ System 100, an acquisitions system for libraries with fund management and reporting capabilities. 

Innovative launched INNOPAC in 1987, adding a terminal-based online catalog module to the existing INNOVAQ system.  INNOPAC evolved into a full-featured integrated library system. 
In 1991, Innovative automated the large OhioLink consortium with a new architecture that became the INN-Reach resource sharing platform.

1997 saw the launch of Millennium embracing the client/server architecture, based on graphical Java clients.  As an early implementer of Java for desktop software, Innovative gained platform independence for its staff modules and less dependence on Microsoft software.   The Millennium modules were released over the next few years and gradually adopted by customer libraries.

In April 1997, Innovative made its only strategic acquisition in its history when it acquired a UK-based SLS Information Systems, which developed the LIBERTAS library management system widely used in Europe at the time. 

March 2011 saw the launch of Sierra, the company’s latest generation of library automation software positioned to rapidly become its new flagship product.

March 2012.  Innovative’s ownership status changes following strategic investments by Huntsman Gay Global Capital and JMI Equity

Industry Perspective

While this change is big news, its impact on the overall industry and to Innovative’s customer libraries should not be overstated.  We can anticipate continued progress with the strategies that the company has already placed into motion, possibly amplified through additional resources that come into play through the new investors. 

Nevertheless, some libraries may have been attracted to Innovative due in part to the way that it had positioned itself as operating independently for the interests of its customers without the influence of external financial institutions.  As Innovative opens this new chapter in its corporate history, it will face the challenge of maintaining the loyalty of its customers by continuing to deliver the products and services that have proven successful to date.  The entry of new investors does not necessarily have to foster customer disillusionment.  Other companies in this industry have seen substantial growth and positive customer relations as they come under new private equity owners.

The library automation industry remains highly competitive, despite the considerable consolidation through previous rounds of mergers and acquisitions.  This change at Innovative does not contribute to industry consolidation.  Today libraries continue to have choices in the types of companies to work with and an interesting variety of library automation products, spanning a range of conceptual designs and technical architectures.  While this transition at Innovative does not immediately reshape the landscape among the library automation companies, we can also count on additional movement in the industry in coming years. 


Comments (2)

As noted, private equity

As noted, private equity firms tend to hold on to their portfolio companies for 5 to 7 years, but the period will naturally vary according to a variety of factors. These investments can draw to a close in different ways, but within the library automation industry, it’s most likely that there will be a transaction involving new investors. Such was the case August 2008 when Leeds Equity acquired Ex Libris Group from the incumbent private equity firm Francisco Partners. While it’s possible for a company to go public as it exits private equity ownership, that scenario seems unlikely given the relatively small size of these companies. While some might seem large within the context of the library automation niche, they are tiny compared to companies in broad IT sectors.

Thanks for a readable and

Thanks for a readable and informative article. You state that "Private equity firms tend to maintain their investments in a company for 5-7 years." What tends to happen at the end of that period? Is the company sold to another private equity firm, or is there a public offering, or something else?