Software AG Looking for an M&A Repeat

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Includes: IDSRF, STWRY
by: 451 Research: Inorganic Growth

by Brenon Daly

Having significantly whittled down the debt it picked up acquiring webMethods two years ago, Software AG (OTCQX:STWRY) is now ready to add on a bit more to cover its pending purchase of IDS Scheer (OTC:IDSRF). It plans to borrow some $470m and pay that back over the next three years or so. With Software AG’s steady cash generation, that shouldn’t be a problem. (The German company, which also pays a dividend, says it is on track to accumulate some $190m in free cash flow this year.)

In fact, we understand that capital questions hardly figured into the firm’s M&A plans, which it had trumpeted for the better part of two years. Instead, Software AG has simply been waiting for prices to come down. And based on the fact that it paid less than half the valuation for IDS Scheer than it handed over for webMethods, we’d say its patience paid off. (Additionally, it is about half the valuation that IBM paid for ILOG, which boosted Big Blue’s business process management portfolio.)

As a final thought on this week’s transaction, we suspect that if Software AG gets half the return on IDS Scheer that it got on webMethods, it’ll probably be pretty pleased with its new purchase. (Arma Partners advised Software AG on both deals.) WebMethods is now the vendor’s second-largest revenue producer. Moreover, the webMethods business expanded 33% in 2008 – twice the rate of overall revenue growth at Software AG last year.