Patience has apparently prevailed for Quest Software (QSFT) shareholders, as Dell (DELL) has publicly announced a deal to acquire the enterprise software company for $28 per share in cash. While Dell has long been rumored as the lead suitor for the company (apart from original bidder Insight Venture Partners), this is the first public acknowledgment from Dell.
The Last Best Offer?
While the convoluted process of selling Quest should be ample proof that this may not be the last word, it seems like this is the end of the story for Quest and its shareholders.
Ever since the early March announcement of Insight's original $23 per share offer, there's been a game of badminton for this company. Given the close relationship between CEO Vinny Smith and Insight, as well as the prior increased bids from Insight, the fact that Dell is making this announcement would seem like a pretty strong sign that Dell's bid has reached the level where Insight won't go higher.
This also happens to be a reasonable bid, giving shareholders nearly 14 times trailing EBITDA and about 2.5x trailing revenue for a company that has struggled (and largely failed) to produce double-digit revenue growth recently. While it may well be true that the cash flow from Quest's service business alone could justify this price, the reality is that it's very hard to get full value for service in the software space.
Last Call Will Probably Go Unanswered
Given the drawn-out sales process and the multiple that Dell is paying, shareholders probably shouldn't hold out hope for another competitive bid. Companies like CA Technologies (CA) and BMC (BMC) certainly could use this business, and you could even make an argument for companies like IBM (IBM) or Microsoft (MSFT) to get involved, but the risks at the price wouldn't make much sense for conservatively-run companies like CA and BMC. Likewise, there likely just isn't enough growth here to really coax a strong bid from IBM or Microsoft.
Now, all of that said, this $28 bid is 50 cents higher than the last bid that Quest Software management publicly discussed. Odds are that Dell nudged up its bid to stave off another see-and-raise round from Insight, but I suppose its plausible that there was a third player involved.
Dell Has To Be Better
Assuming that this deal goes through, Dell is going to have to prove to its shareholders that it can execute on its vision of becoming a diversified tech company along the lines of IBM and Hewlett-Packard (HPQ). So far, the company has had very mixed performance with its storage business, while the service business has really not done all that well.
Quest is a good platform from which Dell can build an interesting software business. The company's TOAD business is a dependable cash generator, and the migration business could do well with the new Microsoft Windows and Office launches. Longer term, businesses like identity management, performance monitoring, data protection, and virtualization all represent attractive opportunities.
The question is whether Dell can fix the growth problems at Quest. Although Quest is platform neutral and designed to offer simpler solutions for IT environments, the company has struggled of late to outgrow companies like CA, BMC, IBM, and Oracle (ORCL) in its core markets. Dell certainly has the resources to support the platform, as well as the ability to bundle solutions, but Dell investors should realize that this is not a "plug and play" acquisition. Arguably, then, the stakes here are disproportionate to the size of the Quest deal - Dell management really needs to prove that it can successfully integrate and improve this deal to validate the "next IBM" strategy.
The Bottom Line
Given that this is a cash deal, I'm in no great hurry to sell these shares. At a minimum, I'm intending to wait a couple of weeks just in case another bid (which I do not expect) materializes. Along similar lines, the discount between the $28 and the current pre-market quote is not enough to really make this a worthwhile arb idea for retail investors.
The legacy of Quest may well be this - value can indeed have its day in the tech world, but shareholders have to be very patient to see that value come to fruition.
Disclosure: I am long QSFT.