Anatomy of a $256M Acquisition: The Story of DynaTrace, Compuware, and Bain Ventures

7/8/11Follow @gthuang

Benjamin Nye has an eye for the Benjamins. That’s not quite a palindrome, but it does sum up Nye’s track record as a tech investor.

Nye, a managing director with Bain Capital Ventures (see photo, right), has had a string of strong exits—including Network Intelligence (bought by EMC in 2006), SolarWinds (IPO in 2009), and LinkedIn (IPO this year). The latest deal came in the past week, when Waltham, MA-based DynaTrace was snapped up by Compuware (NASDAQ: CPWR), the Detroit software firm.

The technical details of what DynaTrace developed (see below) might not be as important as these numbers: $256 million in cash for the acquisition (on about $22 million total invested by BCV and Bay Partners), translating into a 7.2X return on BCV’s investment, Nye says.

Here’s how it all went down. First, let’s rewind to 2006. Nye had heard from a former CEO of a company he was looking to buy that DynaTrace, an interesting year-old startup, was being run by the “smartest guy” he knew. The only problem was the startup was in Austria, so Nye took the entrepreneur call with what he calls “high skepticism.” By the end of the call, however, he was intrigued: DynaTrace had solved a problem that Nye had run up against at his old company, Precise Software. Namely it had a way to help businesses’ IT departments figure out why their software applications (consumer-facing websites, for example) were running slowly, and what to do about it.

“The way he’s doing it versus the industry standard is the difference between causation and correlation,” Nye says. While other companies could make educated guesses based on time stamps and which parts of the code were calling other parts, DynaTrace could pinpoint exactly “which part in the chain was causing an app to run slowly,” he says—which is tough to do in the midst of Internet-scale traffic and disparate pieces of code running in different programming languages.

Nye led Bain Capital Ventures’ $5 million Series A investment in DynaTrace and helped move the company to the Boston area in early 2007, hiring a U.S. team. The company started signing up big customers in banking, e-commerce, and retail, and its revenues more than doubled each year, reaching $26 million (and being cash-flow positive) over the past 12 months.

So why sell to Compuware now? DynaTrace didn’t need to, Nye says, adding that there was plenty of interest but “no other suitors.” (I had to wonder about IBM, but he didn’t comment on that.) He says the decision came down to three factors, besides the price and other terms.

First was the strategic rationale for the deal. In 2009, Compuware bought Gomez (another Boston-area firm), which is complementary to DynaTrace in that it tells you how long it’s taking an e-commerce webpage to load, say, but not why it’s running slow or what to do about it, Nye says. So there was a natural product fit there. Second was the “very, very strong” cultural fit with the DynaTrace team—in particular, making sure the technical staff were treated well in the acquisition and incentivized to stay on “in a very material way,” he says. And third was the “high level of integrity” that Compuware showed throughout the deal process, he says.

Not to get too cheerlead-y here, but Nye is a Boston guy, and (not surprisingly) he views DynaTrace as a Boston success story. “This is an incredible marketplace,” he says. “Boston is a killer place to locate because so much of the customer base is on the East Coast.” Plus it’s much easier to reach the European market here, compared to California, and the tech talent pool is incredibly strong, he says.

As an aside, Nye also co-led Bain Capital Ventures’ investment in LinkedIn, together with Jeff Glass, back in 2008. (Turns out Nye is the brother of Dan Nye, LinkedIn’s former CEO.) That investment didn’t work out too badly either. So I asked him for some broader insights into how he picks companies to bet on. “What I look for is, what are the anchors? What has sustainability associated with it?” he says.

For LinkedIn (NYSE: LNKD), Nye says, it was the fact that the company commoditized lists of executives previously owned by recruiters, and it had “more sustainability and ability to monetize both active and non-active members” than older competitors like Monster.com. (LinkedIn makes money off you whether you’re actively looking for a job or not.)

For SolarWinds (NYSE: SWI), a network management software firm in Austin, TX, it was building “a business model around network performance for network engineers, distributed over the net,” he says. That led to fast, viral growth and an installed base that was a high barrier to entry for competitors.

Lastly, for DynaTrace, it was fundamental intellectual property around how to manage applications in different languages and software environments. “Name one business that doesn’t run on an application. Or thousands of applications. Who doesn’t care about performance and productivity?” he says. “If you have better capability to see what’s going on in the intrinsics of applications, you need fewer IT guys, and you can play more offense than defense.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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