BMC Software - Investors Receive A Fair Value For A Deteriorating Business

May. 6.13 | About: BMC Software, (BMC)

Shares of BMC Software (NASDAQ:BMC) are trading roughly unchanged in Monday's trading session. The software company, which provides IT solutions for enterprises and organizations across the world announced that it would be taken private by a consortium led by Bain Capital, Golden Gate Capital, GIC Special Investments and Insight Venture Partners.

For investors, the deal represents fair value to exit their investment at reasonable prices.

The Deal

BMC announced that it has signed a definitive agreement to be taken private by the Investor Group, which really is a consortium of major investment groups.

The group will acquire BMC for $46.25 per share in cash, implying a mere 1.8% premium over Friday's closing price, thereby valuing the company at $6.9 billion. Note that shares of troubled BMC have already risen 15% so far in 2013 in anticipation of some kind of deal.

BMC's workforce of 6,900 deliver solutions to more than 20,000 IT organizations across the world. BMC offers leading IT solutions including Cloud Management and MyIT offerings enabling businesses and organizations to cut costs and achieve operating objectives.

CEO and Chairman Bob Beauchamp commented on the deal, "After a thorough review of strategic alternatives, the BMC board of directors is pleased to reach this agreement, which provides shareholders with immediate and substantial cash value, as well as a premium to our unaffected share price. BMC believes the opportunity to become a private company will provide additional flexibility and position us to invest more strategically to drive powerful innovation and deliver cutting edge customer solutions."

For the full year of its fiscal 2012, BMC generated annual revenues of $2.17 billion, up 5.2% on the year. The company reported a 12% profit decline, with net earnings coming in at $400 million. The company operates with roughly $80 million in net debt at the moment.

The $6.8 billion valuation of the common equity of the firm values BMC's operating assets around 3.2 times 2012's annual revenues and 16-17 times annual earnings.

The deal has already been unanimously approved by BMC's board of directors. The firm has the option to solicit alternative proposals in the coming 30 days, but it does not expect to receive a superior proposal.

The deal is subject to normal closing conditions, including regulatory and shareholder approval. Hedge fund Elliott Management, which holds 9.6% of the shares, already voted in favor of the deal.

Valuation

BMC Software ended its third quarter of its fiscal 2013 with $1.25 billion in cash, equivalents and short-term investments. The company operates with $1.33 billion in short- and long-term debt for a net debt position of roughly $80 million.

Total revenues for the first nine months of its fiscal 2013 came in at $1.63 billion, up 1.6% on the year before. Net earnings fell 22% to $258.3 million. With its fourth-quarter earnings release due tomorrow, BMC guided for full year non-GAAP earnings per share between $3.35 and $3.45 per share.

At this pace BMC is on track to generate annual revenues of $2.2 billion for its fiscal 2013 on which the firm could earn $320 million on a GAAP basis. The $6.9 billion offer values the firm at 3.1 times expected revenues and 21-22 times annual earnings.

BMC does not pay a dividend at the moment.

Some Historical Perspective

Shares of BMC peaked around levels of $70 back in 1999, when the Internet hype was sending IT-related stock through the roof. Shares fell all the way to the $15-$20 range in the years following and broke out to the upside of that range, peaking around $56 in 2011. Shares fell all the way to their low thirties at the start of 2012 as operating performance was deteriorating, and have risen some 50% on the back of rumors about a buyout, which is finally occurring.

Between its fiscal 2009 and 2012, BMC managed to grow its revenues by a cumulative 16% to $2.17 billion. Net earnings grew by a cumulative 68% to $401 million in 2012, but are expected to fall in 2013.

Investment Thesis

BMC's sale has been largely pushed by activist hedge fund manager Paul Singer, known from his hedge fund Elliott Associates LP, which holds investments in many more technology firms.

Between July of 2011, end the end of the year, shares of BMC had fallen more than 40% from $57 to lows of $32. BMC has a steady cash cow in the form of its mainframe operations, which would boost returns to the private equity firms. Yet the company missed out on the online software market dominated by newcomers like Salesforce.com (NYSE:CRM) and industry giants Oracle (NASDAQ:ORCL) and SAP, which recently made large investments in the field. As investors recognized that BMC was losing its ability to compete against these players the stock sold off.

Shares are up 13% over the past year and up 15% in 2013 alone as Singer took a 9.6% stake in the company and urged management to sell the company. The company already took steps to improve shareholder value including a round of job cuts, announced in April of this year. Developments seem to end with the entire sale of the company, which should not come as a surprise at all.

Private equity firms will get a decent deal as they will get hold of the mainframe business, which is a true cash cow. They will finance the deal with a lot of cheap debt, thereby making the deal not as risky as it seems. Shareholders should be happy and tender their shares as well. Management and Singer are happy to sell at this level, and investors get a fair price for a deteriorating business, which is certainly not a fire-sale price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.