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BMC buyout gives technology M&A a lift

by Chris Nolter and Jonathan Marino | Published May 7, 2013 at 9:21 AM

Houston-based software company BMC Software Inc., which agreed Monday to be acquired by an investor consortium in a deal worth nearly $7 billion, is giving the 2013 technology M&A scene a jolt. Sector watchers said the deal could potentially foreshadow a boom in tech M&A, which, after one quarter, has been sluggish.

Bain Capital LLC, Golden Gate Capital, GIC Special Investments Pte. Ltd. and Insight Venture Partners are offering $46.25 per share for BMC. The deal carries a 30-day go-shop window during which BMC can look for higher bidders.

Thanks to historically low multiples and an abundance of cash on their balance sheets, big technology companies -- especially those, like BMC, which have underperformed compared to market benchmarks over recent months -- could be besieged by financial sponsors, one tech executive said.

Other potential opportunities for private equity include North Carolina-based software developer Red Hat Inc. or California-based data management firm NetApp Inc. Each has underperformed benchmarks for its respective market, one banker noted. The technology executive who spoke with The Daily Deal said debt markets will support buyouts that are $10 billion, or even larger, something he asserted would not have been possible 12 months ago.

"Dell is about as big as they can do unless they all team up," the source said, adding, "which they hate doing."

The $6.9 billion price for BMC's buyout gives the Houston IT software company a higher valuation than CA Technologies Inc., which some analysts have described as its most comparable peer. Other companies in the sector have attracted higher valuation metrics, but considering BMC's prolonged and public marketing period a sweetened bid may not be likely.

Evercore Partners Inc. analyst Kirk Materne put the valuation at 9 times projected 2014 operating cash flow, in a Monday note.

CA, which Materne calls "perhaps BMC's closest comp," trades at about 7.7 times 2014 operating cash flow.

Companies such as Citrix Systems Inc. and VMware Inc., which have higher growth prospects, trade at about 11 times Evercore's estimate for 2014 operating cash flow.

Jefferies LLC analyst Aaron Schwartz valued the BMC purchase at 7 times Ebitda and 10.3 times free cash flow, compared to CA's trading multiple of 6.4 times Ebitda and 9.3 times free cash flow.

Schwartz wrote in a Monday report that the price implies a $13 per share value for Compuware Corp.

Compuware, which overlaps in the mainframe computing market, has been seen as a potential target. The Detroit-based software company was essentially flat Monday afternoon at $11.81.

Shareholder Elliott Management Corp. began agitating for a sale of BMC last year. The buyout offer marks a 14% premium to average price before Elliott first disclosed its stake. Schwartz noted that recent PE deals have carried a 24% median premium, but did not suggest that a sweetened deal would be likely.

"We believe the transaction will close in its current form and do not expect competing offers to arise due to the process that led to this transaction and likely less strategic interest," Schwartz wrote.

Last July, Elliott Management dropped its bid to install four directors when BMC agreed to expand its board to 12 directors. The company is led by CEO Bob Beauchamp.

Elliott Management has agreed to vote its 9.6% stake in favor of the transaction.

BMC has had issues. In early April, the company announced cutbacks that will lead to a charge of $33 million to $38 million.

Abhey Lamba of Mizuho Securities USA Inc. suggested that an LBO could aid BMC by allowing the company to devote more sources to products such as Remedy, a sort of IT help desk product.

"The company's performance in the help desk space has been suffering and it will need continued investments to improve its performance," he wrote.

"Additionally, the company's sales execution should improve as customers will be less reluctant to do ... business now that there is more clarity about its future."

Golden Gate Capital has widespread investments in software. Including BMC, the company's portfolio would have about $8 billion in collective revenues. The PE firm has backed companies such as Infor Global Solutions Inc., which acquired Mapics Inc. and Lawson Software Inc. Golden Gate was part of a group that bought Attachmate Group in 2005 and bought Novell Inc. for $2.2 billion in 2011.

The auction for BMC reportedly came down to private equity firms.

Earlier this year, Cowen and Co. suggested that a PE group could buy BMC in the mid-$50s and still target an internal rate of return of 35% to 40%. The firm included caveats, noting that BMC had been considered a target multiple times in the past three years.

One source, who spoke on the condition of anonymity, said Bain Capital X, a fund raised in 2008, was the vehicle the private equity firm used to back the BMC deal. A representative for venture capital firm Insight Venture Partners declined to comment -- the firm is in the midst of its own fundraising, according to a filing submitted with the Securities and Exchange Commission. A Golden Gate representative could not be reached for comment by press time.

No financing condition is associated with the transaction. Credit Suisse Group, RBC Capital Markets LLC and Barclays plc agreed to provide debt financing.

Morgan Stanley and Bank of America Merrill Lynch are financial advisers, and Wachtell, Lipton, Rosen & Katz is serving as legal counsel to BMC.

A team from Weil, Gotshal & Manges LLP represented Morgan Stanley, including Michael Aiello, Frank Martire and Allison Donovan.

A Kirkland & Ellis LLP team that included Sarkis Jebejian, Matthew Steinmetz, Matthew O'Brien, Jeff Richards, Claire Sheng, Linda Myers and Michelle Kilkenney provided legal counsel to Bain and Golden Gate. Willkie Farr & Gallagher LLP's Gordon Caplan and Morgan Elwyn were legal advisers for Insight Venture Partners. PricewaterhouseCoopers LLP served as accounting adviser to the investor group.

Qatalyst Partners, Credit Suisse, RBC Capital and Barclays are financial advisers to the investor group. Sidley Austin LLP provided legal advice to GIC.

Moelis & Co.'s John Joliet, Stu Goldstein and Craig Wadler advised Elliott Management.

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