Recently, it has been reported that BMC Software, Inc. (NASDAQ:BMC) might be taken private by some private equity firms for more than $6 billion. Right after the news, BMC’s stock price jumped as much as 9% in one trading day. Last year, BMC was under pressure to sell itself from activist investor Paul Singer, who runs Elliott Management.
Since the beginning of January, BMC has experienced a nice rally, from $32 per share to nearly $46 per share. Should existing shareholders cash out on the buyout news now? Or is it an investment opportunity to buy the stock? Let’s find out.
Business snapshot
BMC Software is considered one of the biggest global software companies providing IT management solutions for both public and private organizations globally, operating in two main business segments: Enterprise Service Management (ESM) and Mainframe Service Management (MSM).
In 2012, ESM contributed $1.34 billion in revenue, whereas the net sales of MSM were $830 million. The company derived its revenue and profits from three main services: license, maintenance, and professional services. The majority of its revenue, more than $1 billion, or 49.8% of total 2012 revenue, was generated from maintenance services, while license sales ranked second, generating around $878 million, or 40.4% of total sales.
A growing bottom line and consistent cash generation
In the past ten years, BMC has done well. While revenue increased from $1.32 billion in 2003 to only $2.17 billion in 2012, its net income rose significantly, from $48 million to $401 million in the same period. What interests me is the consistent positive cash flow that BMC has generated over the past ten years.
Operating cash flow fluctuated in the range of $421 million to $800 million, while free cash flow stayed in the range of $331 million to $641 million. In 2012, BMC generated $800 million in operating cash flow and $641 million in free cash flow.
Investors might be scared of the over-leverage that BMC employs in its operations. As of December 2012, it had $680 million in total stockholders’ equity, $1.18 billion in cash and $1.3 billion in long-term debt.
Like other big software companies, BMC has grown via acquisitions. Thus, its goodwill and intangible assets are big items on the balance sheet, at nearly $2.2 billion. The tangible book value was negative at $678 million. Interestingly, BMC’s low equity was also due to its significant share buybacks over the years. Since 2008, treasury stock has increased from $1.57 billion to nearly $3.88 billion.
Activist investor pushed BMC to sell itself
As the end of January, activist investor Paul Singer owned around 9.6% stake in the company. Last year, Paul Singer’s Elliot Management suggested that in order to increase stockholders’ value, BMC should explore a sale to strategic acquirers or to financial sponsors.
In the presentations, Elliot Management stated several potential acquirers, including International Business Machines Corp. (NYSE:IBM) and Hewlett-Packard Company (NYSE:HPQ). Both IBM and Hewlett-Packard might acquire BMC for the consolidation in the IT Management Software market.
At an acquisition of $52 per share, IBM’s EPS might increase 1.4% in 2013, while Hewlett-Packard Company (NYSE:HPQ)’s EPS might increase as much as 3.1%. At $60 per share, 2013 EPS of IBM might rise 1.1%, while Hewlett-Packard Company’s EPS might increase 2.5%.
At $46 per share, BMC is worth nearly $6.6 billion on the market. The market values BMC at 11 times EV/EBITDA. International Business Machines Corp. (NYSE:IBM), at around $212 per share, has a total market cap of around $236 billion. It has a much cheaper valuation than BMC, at only 9.6 times EV/EBITDA. Hewlett-Packard Company (NYSE:HPQ) is trading at around $24 per share, with a total market cap of $46.6 billion. The company has the cheapest valuation at only 4.2 times EV/EBITDA. In terms of profitability, BMC and International Business Machines Corp. (NYSE:IBM) have equal operating margin at around 21.2%, while the operating margin of Hewlett-Packard is only 8%.
The Foolish bottom line
With the case laid out by Elliott Management, BMC could be acquired by strategic partners in the range of $52 – $60 per share. Indeed, BMC could fetch a much higher bid than its current trading price, and investors might gain further. However, I personally think that BMC is reasonably valued at 11 times EV/EBITDA.
The article Should Investors Hold on to This Software Company on a Buyout News? originally appeared on Fool.com and is written by Anh HOANG.
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