[dropcap]F[/dropcap]our years after Blackstone Group and Silver Lake Management battled to take Dell private, buyout firms are back in the market for big leveraged technology deals.
BMC Software, owned by Bain Capital and Golden Gate Capital, and CA are considering a potential deal that would see the software companies combine as part of a transaction to take CA private, according to people familiar with the process. CA shares rose as much as 16% on Tuesday, valuing the New York-based company at more than US$15bn.
If a deal goes ahead, and if it’s structured as a leveraged buyout by the private equity firms followed by a combination with BMC, it would be the biggest LBO of a tech company since Silver Lake and Michael Dell won the fight to buy Dell in 2013 in a transaction valued at almost $25bn. Two years later, Dell announced its own mega-deal: the $67bn acquisition of EMC.
Another big tech deal is also in the works, as a group led by Boston-based Bain and Japanese investors is the leading bidder for Toshiba’s memory-chip business. The buyers have indicated that they’re willing to pay ¥2.1 trillion ($19bn) for the semiconductor unit, people with knowledge of the matter have said. The parties are aiming to reach final agreement by 28 June and close by March, Toshiba said Wednesday.
Private equity firms’ appetite for big deals has been tempered in recent years, with the spectre of the leveraged-buyout boom of 2005 to 2007 still hanging over the industry. During that period, buyout firms spent huge amounts of money on about 20 supersized deals — each valued at more than $10bn — many of which failed to deliver returns in line with expectations.
Since the start of 2008, just one such deal other than Dell has been led by a private equity firm: Apollo Global Management’s $12.3bn acquisition of ADT last year.
More cautious
Now, buyout firms are testing the waters again. As well as the potential BMC-CA deal, cloud-services company Citrix Systems has been working with advisers to seek possible suitors, attracting interest from private equity investors including Bain, Carlyle Group and Thoma Bravo, Bloomberg reported in May.
There are signs, though, that the firms are being more cautious this time around: discussions between Citrix and potential financial bidders have stalled because the company’s asking price was too high and the business too large, people familiar with the process said earlier this month.
That’s a shift from the boom years, when private equity’s debt-fuelled spending spree saw it triumph in several deals valued at more than $30bn. Those included the record $48bn buyout of TXU, now called Energy Future Holdings, which was the only total equity wipeout of the 19 mega-deals. The company’s 2014 bankruptcy vaporised an $8.3bn bet led by KKR & Co, TPG and Goldman Sachs Group.
Leveraged buyouts, in which financial sponsors raise a large amount of debt to finance an acquisition, rely on banks’ willingness to write large checks. BMC and CA have already approached banks about putting together a debt package to finance the potential purchase of CA, said the people, who asked not to be identified because the information isn’t public. Talks are at an early stage and there is no guarantee a deal will be reached, the people said.
BMC has been owned by Bain and San Francisco-based Golden Gate since 2013, when they took the company private in a deal valued at about $6.9bn, according to data compiled by Bloomberg. The firms, which took a $750m dividend from the company in 2014, may contribute new equity to help finance the deal for CA, the people said.
BMC, Bain and Golden Gate declined to comment. Representatives for New York-based CA didn’t respond to requests for comment.
Dry powder
As private equity firms grapple with record amounts of dry powder for acquisitions, they’re looking for more creative ways to deploy it, according to Stephanie Cohen, head of financial sponsors M&A at Goldman Sachs.
Buyout firms are sitting on about $600bn of capital, which is more than during the leveraged buyout boom that preceded the financial crisis, Cohen said Tuesday in a Bloomberg Television interview at the Goldman Sachs Leveraged Finance Conference in California.
“They’re taking their portfolio companies and turning them into strategic acquirers,” Cohen said.
Structuring deals that way allows private equity firms to compete more equally with corporate acquirers, which can typically bid higher than financial buyers in auction processes. It also gives a buyout firm the chance to benefit from synergies between the company it already owns and the new asset, as well as creating a potentially bigger pay cheque once the combined, larger business is taken public or sold.
CA, led by CEO Michael Gregoire, develops applications for cloud and mobile computing, with most of its revenue coming from maintenance contracts and subscriptions. Founded in 1976 as Computer Associates International, the company went public in 1981 and eight years later was the first software company to reach $1bn in revenue, according to its website.
It has grown through smaller acquisitions, agreeing to buy app-security testing firm Veracode for $614m in cash, after announcing the acquisitions of Automic Holding in 2016 as well as Rally Software Development and Xceedium in 2015.
Mainframe business
Acquisitions have helped offset slowing organic sales growth at CA’s mainframe business, according to a report from Bloomberg Intelligence. The company’s mainframe solution unit generated about 54% of revenue in the 2017 financial year, while enterprise solutions contributed 39% and services made up 7%.
Legacy mainframe software vendors have proved popular among private equity firms looking for stable returns from their subscriber base. A year after the BMC buyout, Compuware, a Detroit-based seller of business software, agreed to be taken private by Thoma Bravo in a deal valued at $2.5bn, following pressure from activist investor Elliott Management.
“An influx of capital allocated to the sector and favourable debt terms means we can expect to see more leveraged buyouts in the tech space in the foreseeable future,” said Ron Murphy, a partner at EY’s Americas transaction advisory services unit. — Reported by Kiel Porter and Alex Sherman, (c) 2017 Bloomberg LP
