Roy sells ThoughtWorks
23 August 2017
ThoughtWorks, my employer, had some big news to share today. Our founder and owner, Roy Singham, has decided to sell ThoughtWorks to Apax Funds - a private equity firm based in London. Apax wishes the current management team to continue running and growing ThoughtWorks, using the same model that's driven our growth and success for the last twenty-odd years.
Why Roy is selling ThoughtWorks
Roy Singham founded ThoughtWorks over two decades ago. He has owned almost all of the company ever since. While I was surprised to hear that he was selling the company, the news was not unexpected. Over the last few years Roy has been increasingly involved in his activist work, and spending little time running ThoughtWorks. He's been able to do this because he's built a management team that's capable of running the company largely without him. But as I saw him spend more energy on his activist work, it was apparent it would be appealing to him to accelerate that activism with the money that selling ThoughtWorks would bring.
Another issue encouraging a sale has been the difficulty of creating a post-Roy ownership structure for ThoughtWorks. Roy has often talked about setting up some kind of trust to own ThoughtWorks and maintain its values into the future. But setting up such a trust implies a change of ownership, and a change of ownership involves taxes. A consulting company runs on a relatively small margin of cash, and the tax bill involved in a change of ownership can be crippling . This has particularly come out as we've looked to set up arrangements should Roy die unexpectedly. His death would trigger a tax event that we could not pay from our own resources, forcing a fire sale. Despite several years of effort, we haven't found a way that would preserve the company in its current form. This further encouraged him to sell when there is no tax bill hanging over our head.
Change is always disconcerting, and switching from Roy's vision to a conventional investor certainly raises questions in my mind for our future. I find it encouraging that Apax does seem to genuinely recognize what makes us unique, and wants us to continue operating in a way that preserves our people-centered approach to software development.
Indeed the whole sale process (that went on for most of this year) proved rather interesting. Several firms were interested in buying us, some private equity companies, and some well known IT services firms. Indeed a couple of the latter were seriously exploring buying us before Roy had decided he wanted to sell. I learned that these IT services firms were concerned that their traditional approach to building software was a diminishing market and were keen to buy us in order to shift into an approach that they saw as the future.
When I joined ThoughtWorks in 2000, I did so because I saw a company full of people that shared my view on what effective software development should be like. Most IT services firms I'd seen relied on cozy partnerships with enterprise software vendors. Customers buy some big complex package, then spend a fortune on a services firm to "customize" it to their environment. Usually the services firm gets a substantial fee from a vendor for recommending their product. ThoughtWorks, however, relied on hiring capable technologists who value multi-disciplinary collaboration, and giving them the independence to judge the best solution. Consequently we've embraced open source software and agile ways of working.
Back in 2000, many argued that our approach was too idealistic to be commercially viable, yet we've succeeded in growing from the 300 person US company I joined in 2000 to the 4500 person global company that we are now.
Our new owner, Apax Funds, is a private equity investor based in London. Like many people, I have an instinctive distrust of private equity, but just like IT services companies, there are many questionable private equity firms but a few good ones. So far our experiences with Apax are encouraging. They put careful effort into their research on us, and seem to recognize the traits that have allowed us to succeed so far. They want us to continue with our business practice, including our three-pillar model, and are eager to maintain the existing management team that Roy has built.
We often joke that Roy's yacht is his activist work, and we're happy to see profits from our efforts helping it sail. I'm sad that we'll lose that, and instead our work will fund regular investors like normal corporations. But there is still much good work we can do for our clients and the software profession. The valuable business that enabled Roy to sell was based on that work, and we should be able to continue with it. I've always felt that, despite the many bad things that many businesses do, it is perfectly possible to run a business so that it provides a benefit to society as well as a profit to its owners.
I believe we can, and should, continue following the principles that have been the foundation to our success so far. This means we'll continue to hire capable people from all sorts of backgrounds, provide an environment for them to collaborate, build valuable software for our customers, share our lessons with the software profession, and advocate for greater social responsibility within our profession. There is certainly a risk that a more conventional owner will erode these principles, but I think we have a good chance of continuing to keep them in place.
ThoughtWorks has always been, to a large extent, Roy's social experiment to see if a commercial company can be run in a different way to the prevailing wisdom. In the last two decades we've built a company which is capable of operating successfully without him. The next phase of the experiment is to see if that company can continue to succeed under more conventional ownership. I know we're up to the challenge, and I want to be around as long as I think we can succeed, so I can share in the triumph.
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1: Whether Roy transferred the company to a foundation, the employees, or sold to private equity, there is always tax to pay. The difference is that a commercial buyer is able to pay it. Consider a case where Roy, mindful of my great wisdom and dress-sense, decides to give the company to me - which means he gives all his shares to me. Initially that sounds great, I own ThoughtWorks and am able to direct its future. But then the tax man arrives, and points out that I've been given something of value, and this counts as part of my income. We then have to value that income, and I am assessed tax on that. So if Roy were to give me $100 million dollars worth of shares, I'd be faced with a (roughly) $50 million dollar tax bill. The only way I can afford to pay that is to sell my shares, and since the tax man isn't known for his patience, I have to sell quickly, which means I'll have to settle for a lower price. Of course, I won't have to sell all the shares, but with tax rates as they are I would have to sell more than half, and would thus lose control of ThoughtWorks.