Kiel Porter and Alex Sherman (Bloomberg) — Four years after Blackstone Group LP and Silver Lake Management battled to take Dell Inc. private, buyout firms are back in the market for big leveraged technology deals.
BMC Software Inc., owned by Bain Capital and Golden Gate Capital, and CA Inc. 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 percent Tuesday, valuing the New York-based company at more than $15 billion.
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 $25 billion. Two years later, Dell announced its own mega-deal: the $67 billion acquisition of EMC Corp.
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 Corp.’s memory chip business. The buyers have indicated that they’re willing to pay 2.1 trillion yen ($19 billion) for the semiconductor unit, people with knowledge of the matter have said. The parties are aiming to reach final agreement by June 28 and close by March, Toshiba said Wednesday.
Private equity firms’ appetite for big deals has been tempered in recent years, with the specter 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 $10 billion — 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 LLC’s $12.3 billion acquisition of ADT Corp. last year.
Now, buyout firms are testing the waters again. As well as the potential BMC-CA deal, cloud-services company Citrix Systems Inc. has been working with advisers to seek possible suitors, attracting interest from private equity investors including Bain, Carlyle Group LP 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-fueled spending spree saw it triumph in several deals valued at more than $30 billion. Those included the record $48 billion buyout of TXU, now called Energy Future Holdings Corp., which was the only total equity wipeout of the 19 mega-deals. The company’s 2014 bankruptcy vaporized an $8.3 billion bet led by KKR & Co., TPG and Goldman Sachs Group Inc.
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 $6.9 billion, according to data compiled by Bloomberg. The firms, which took a $750 million 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.
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 $600 billion of capital, which is more than during the LBO 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 paycheck once the combined, larger business is taken public or sold.
Watch the full interview on private equity’s dealmaking potential here
CA, led by Chief Executive Officer 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 $1 billion in revenue, according to its website.
It has grown through smaller acquisitions, agreeing to buy app-security testing firm Veracode Inc. for $614 million in cash, after announcing the acquisitions of Automic Holding GmbH in 2016 as well as Rally Software Development Corp. and Xceedium Inc. in 2015.
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 percent of revenue in fiscal 2017, while enterprise solutions contributed 39 percent and services made 7 percent.
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 Corp, a Detroit-based seller of business software, agreed to be taken private by Thoma Bravo in a deal valued at $2.5 billion, following pressure from activist investor Elliott Management Corp.
“An influx of capital allocated to the sector and favorable 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.
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