SunGard IPO: An Intriguing But Tricky Investment

by: Khurram Aziz

SunGard Data Systems Inc., an IT company for the financial service industry, has launched its IPO on June 4.

SunGard represents a market that should be expected to grow as the financial services industry recovers from the 2008 crash and looks for IT help.

There are concerns about SunGard itself, namely its past losses and the inherent risk in the financial services industry.

For this reasons, investment in the company is not recommended.

One of the biggest initial public offerings (NYSEARCA:IPOS) of the year has just filed. Whether you should bite on it is another story.

SunGard Data Systems Inc. has filed for an IPO with the SEC this past Thursday. While the data company has a proposed maximum aggregate price of $100 million, that is a placeholder. The company indicated in May that it actually plans to raise around $750 million. This would make it the third largest placeholder of 2015.

SunGard is a software company that "provides mission-critical software and IT services to institutions in virtually every segment of the financial services industry." According to its SEC filing, SunGard has more than 15,000 customers in over 100 countries. These customers include most of the largest banks, asset managers, vascular surgery companies, private equity firms, and insurance companies in the world.

And SunGard does have reason to believe that its service will continue to be needed. As financial companies recover from the 2008 crash and look to improve their self-policing, new software will be necessary. The financial services industry spent $190 billion on IT in 2014.

More of this new money in IT is going to third-party companies, such as online retailers, instead of in-house representatives. SunGard states that spending on third-party software is projected to climb to $45 billion by 2018, compared to $35 billion last year.

Furthermore, SunGard is receiving help from JP Morgan, Barclays Plc, Deutsche Bank AG and Credit Suisse Group AG. The presence of these major financial companies can provide reassurance that they will support SunGard and ensure the transition goes smoothly.

But while SunGard may paint a rosy picture of its IPO, there are some concerns about investing in them.

The first issue is what SunGard intends to do with the money that it raises from the IPO. Reports indicate that it intends to use it to pay off debts rather than expand its business. While SunGard did have a revenue of $2.4 billion in 2014, it lost $396 million. It also has lost money every year since 2010.

SunGard in short, is not looking to expand. In fact, it used to help higher education institutions along with financial institutions before it split the higher education part off under the name of SunGard Availability Services. That split off unit helped lower Sungard's tax burden, but the company noted in its IPO filing that it must give that up if it is to become a public company.

These financial troubles have meant that SunGard's current private equity owners, Bain Capital LLC and Blackstone Group LP, have held on to the IT company longer than usual. SunGard is currently in the process of looking for another private-equity firm to acquire it. This process means further instability and yet another reason why SunGard's business and stock could falter in the short term.

And while the financial services industry appears to be recovering, there remain threats like additional setbacks and the specter of looming government intervention in the industry. These could be concerns for Sungard's ability to operate in the coming years. There is also the possibility of SunGard being defeated by foreign or domestic hackers. The recent news that Chinese hackers have uncovered data on over 4 million US government workers should show what a huge risk that is.

The current financial services market does appear to be stable, and so SunGard should be a decent investment for an IPO. But given their past financial problems as well as their need to find a new owner, another IPO may be a better choice for investment if you are looking for something with less risk.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.