Sungard plans bankruptcy reboot; hedge funds to replace buyout firms

Update 4/2: Sungard Availability Services, the Wayne-based data infrastructure and recovery provider, said today that it has won the support of most of its creditors for a plan to forgive more than $800 million of the company’s $1.25 billion in debt as part of a pre-packaged Chapter 11 filing in U.S. Bankruptcy Court in New York.

The company expects to file around May 1, promised its corporate customers business as usual while it’s in bankruptcy, and said it expects to exit bankuptcy as a stronger company "very shortly after.”

Sungard chief executive Andrew Stern said in a statement that the company has polled investors and creditors about the plan in recent days, and has so far won support from “over 75 percent of the secured lenders” and most noteholders. Read Sungard Availability’s statements and proposals here.

“Sungard’s transfer of ownership to its creditors, accomplished by a pre-packaged bankruptcy filing, is not surprising," given competition from Amazon AWS and Microsoft Azure, said Eric Snyder, head of the bankruptcy department at New York law firm Wilk Auslander. The writedown is an admission by Sungard Availability’s blue-chip private-equity investors “that they paid too much for the company” and piled up too much debt, he added. "Even with this 70% reduction in debt, it is unclear how Sungard will generate profit in this sector after it emerges from bankruptcy.”

Earlier: Sungard Availability Services, the Wayne-based disaster-recovery and data-infrastructure company that kept Wall Street and major industries’ computers running during the 9/11 attacks, hurricanes and other disasters, plans to file for bankruptcy reorganization in New York. The private-equity buyout firms that have controlled the company for 14 years will give up control to the hedge funds that have financed its mounting debts.

The company, which employs 2,500, including 160 at its Philadelphia backup centers and 260 at its Wayne headquarters, expects to detail its plans in public statements Tuesday, and hopes to be in and out of bankruptcy with the approval of its creditors later this month.

Andrew Stern, Sungard’s chief executive, who joined the firm nine years ago, said Monday that the company, investors and creditors had spent four months negotiating the deal. He expected that the creditors-turned-owners will install a new board, which will decide on who will run the reorganized company.

“The company emerges far stronger” from bankruptcy, Stern added. “It will be capitalized appropriately. There will be no impact on customers, moving forward. The creditors understand they don’t want to drag anything on that would damage the business.

“There’s no question the shift to cloud is part of what’s challenged us,” Stern said. But even before the cloud, by the late 2000s, “the approach the company had taken to disaster recovery really hadn’t changed in 20 years — and the world had moved on. … We had been slow in recognizing the business had to change.”

Stern says Sungard has been adapting to the new market: “Forty percent of our revenue comes from new services that didn’t exist eight years ago.” Sungard initially tried to meet rival remote-server “cloud”-based systems with its own “private-cloud” solutions. But its large corporate clients by 2016 were migrating to the large, secure cloud systems maintained by Amazon, Microsoft and other giant companies, Stern added. “We suddenly found ourselves competing with much bigger environments at much greater scale.”

Sungard couldn’t beat them, so it signed up as one of 130 Amazon-audited managed service partners, recruiting and customizing Amazon Web Services for corporate disaster-recovery customers, including, most recently, government agencies in England. “But that change has taken time,” Stern added.

Sungard’s debt totals about $1.25 billion. That’s more than the company’s expected sales of just over $1 billion this year, down from $1.4 billion in 2015, when the company was separated from other businesses of the former SunGard Data Systems and turned into an independent firm.

The reorganization plan, if approved by creditors, would reduce that debt to about $400 million, and provide $100 million in bankruptcy financing that would convert into expansion capital if the reorganization is concluded quickly, as the company plans.

In return for writing off two-thirds of the company’s debt, hedge fund creditors including Blackstone Group’s LP’s GSO debt investment unit, Angelo Gordon & Co., Carlisle Group, and Contrarian Capital Management — firms that specialize in turnarounds and liquidations, sometimes dubbed “vulture capitalists” — will take control of Sungard Availability.

They will replace a group of buyout investors including Bain Capital LLC, Blackstone Group LP’s buyout arm (another branch of the same Blackstone is a creditor), KKR & Co. LP, Providence Equity Partners LLC, Silver Lake, and TPG Capital LP (Texas Pacific Group).

These buyout firms had controlled Sungard since buying the formerly publicly traded company for $11.4 billion , 70 percent of it borrowed, in 2005 — a period when Sungard Availability failed to keep up fast-changing developments in the disaster-recovery and data-storage business.

The buyout artists won’t go away broke: The company has sold its financial technology, college systems, and other units in recent years, raising more than $6 billion in equity and paying down at least $4 billion in debt. (Goldman Sachs Capital Partners LP was also part of the 2005 owners’ group but dropped out after the financial crisis of the late 2010s.)

Sungard’s old model was of “shared infrastructure,” including well-protected back offices where information technology people from stricken companies set up alternative operations when their main systems were down. SunGard has struggled with competition from cheaper and cloud-based rivals, including Amazon Web Services.

Stern says Sungard Availabiility has been adapting to the new market: “Forty percent of our revenue comes from new services that didn’t exist eight years ago.” Sungard initially tried to meet rival remote-server “cloud”-based systems with its own “private cloud” solutions. But its large corporate clients by 2016 were migrating to the large, secure cloud systems maintained by Amazon, Microsoft and other giant companies, Stern added. “We suddenly found ourselves competing with much bigger environments at much greater scale.”

Sungard couldn’t beat them, so it signed up as one of 130 Amazon-audited Managed Service Partners (MSPs) recruiting and customizing Amazon Web Services for corporate disaster-recovery customers, including, most recently, government agencies in England. “But that change has taken time,” Stern added.

Sungard descends from Sun Information Systems, founded in the 1970s as a backup for early data systems at oil and chemical plants run by the former Philadelphia-based Sun Oil Co. In the 1980s, founder John Ryan diversified the company, offering backup services to the city’s then-thriving banks as they computerized deposit, loan and investment records.

By the late 1990s an independent, publicly traded SunGard Data Systems (including the original business, which later became Sungard Availiability) was worth more than Sun Oil’s parent company, Sunoco, and was using its profits to buy dozens of financial, government and college software services across Europe and Asia as well as North America.

Sometimes SunGard Data acquired competing systems in the same market sector and let them continue competing for a time. In the late 1990s then-chief executive Cristobal Conde began combining SunGard products into large groups focusing on recovery (Availability), financial, government, education and other major sectors.

The Inquirer asked Conde in 1999 why SunGard Data didn’t roll out its own trading services, selling directly to investors and traders, and eliminating the expense of the middlemen. Conde said the company was equipped to run its own networks, but didn’t want to compete with its big financial clients. The company missed out on much of the profit financial tech firms earned by developing proprietary trading markets in the 2000s.

The 2005 acquisition of SunGard Data by the buyout firms was one of the biggest deals of its kind before the 2008 financial crisis temporarily froze tech buyout financing. The buyers at first talked about boosting SunGard Data sales in part by pitching its services to other companies they own, managers said at the time. Three years later, sales peaked at over $5 billion and employment topped 20,000.

But with its owners mostly concerned with pulling cash out of the company, it lost what its leaders admitted were a “tsunami” of corporate customer cancellations as the disaster-recovery market changed, and the company didn’t keep up. Conde stepped down to focus on his tech investments in 2011. Also in 2011, SunGard Data sold its main college business to Virginia-based Ellucian for $1.8 billion.

In 2014 SunGard Data split in two. The next year the larger piece, Wayne-based SunGard Data Systems Inc., with sales of $2.8 billion and offices in South Jersey as well as the western Main Line, was sold for $5.1 billion (plus $4 billion in debts the buyer assumed) to Jacksonville, Fla.-based Fidelity Information Services (FIS).

UPDATE 4/3: SunGard Founder John M. Ryan, who lives with his wife Mary Gregg (of Greater Philadelphia First and the Philadelphia Liberty Medal) in Bala Cynwyd when they’re not wintering around Naples, Fla., writes: "What a surprise to find SunGard making the news again! You did a good job tracing its history, some of which, the recent years, was sort-of new news to me.

"I started what became SunGard in 1978 as a possible diversification strategy when I was responsible for IT functions at Sun Oil. During that period there were a number of executive and organizational changes, leading to my getting the opportunity, in the very early days of private-equity investing, to find four PE firms willing to acquire SunGard in early January 1983 for $20 million, $3 million in cash and $17 million in debt.

“We really had two distinct businesses, the home-grown data-center backup business and the many-systems-for-money-management business built by acquisitions, about 50-50 in revenue growth and margins. We went public in Spring of 1986 and paid off all the debt, $10 million,” mostly to Sun.

“The venture investors got 20X their investment 40 months, with liquidity. And, as you point, SunGard passed Sun Oil in market cap in the 1990s, when I was replaced by Jim Mann as CEO, who drove the company to a sale transaction of $11 billion cash.”

The private-equity firms that bought SunGard, of course, “took out cash and loaded up debt and carved up the company. I had stopped following the trail. I’ve spent the last 25+ years investing in and joining the boards of about 25 early-stage technology companies, with mixed results but more wins than losses, and lots of fun and friendships.”

Those “mixed results” include SevOne, Health Market Science, and Thermacore, which were acquired by larger companies at fat multiples; and “Neoware and eResearch Technology, which went public and then later acquired.”

Ryan’s last venture investment is HGE Healthcare, run by Michael Marcus, which uses science developed by Temple Health pulmonologist Dr. Gerald Criner to relieve Chronic Obstructive Pulmonary Disease (COPD) patients. Besides Temple, Criner, Ryan, Gregg and Markus, backers include “about 25 friends of Temple” and a Big Pharma firm that has rights if the product takes off. Other than that, “I’m pretty-much retired.”