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Thursday, 18 September 2014

Persistence pays

BMC deal shows how activist playbook brings profit

Elliott Management has once again pushed a technology firm into selling itself. This time BMC Software is going for $6.9 billion to a private equity group led by Bain Capital and Golden Gate Capital. At $46.25 a share, the 2 percent headline premium over Friday’s closing price may seem tiny. But that’s more than a 30 percent return for Elliott, adding to its record of similar successes at Novell, Packeteer and Blue Coat.

BMC was a prototypical case of a tech company that lost its mojo. Its software for running mainframe computers is solidly profitable. But public market investors don’t like businesses that are in long-term decline as their customers gradually shift to newer technologies. BMC’s server and network business has better long-term prospects, but growth has been sluggish. On top of that, BMC’s margins were lower than those at bigger peers, and management had squandered capital on acquisitions in an attempt to stay relevant.

Tech zombies can, however, wander about for years - and throw off a lot of cash in the process. BMC, for example, has been touted as a potential takeover candidate for the past decade. Elliott emerged as a big investor in BMC in early 2012. While the stock quickly rose from around $35 when news of the fund’s involvement broke, it took about a year of effort to actually achieve a sale. The campaign included public pressure for a sale, a proxy fight, the appointment of two new directors to the board, and ultimately a successful auction.

Plan A was probably for a deep-pocketed rival to pay up for BMC. But with Hewlett-Packard and Dell struggling, IBM out of the picture for antitrust reasons, and SAP and Oracle consumed with bigger battles, that didn’t happen. The relatively predictable nature of BMC’s enterprise software business - in contrast, say, to Dell’s more quickly declining PC operations - and its relatively unlevered balance sheet ensured that as an alternative there would be private equity interest.

Not only did Elliott stick to its guns, a characteristic also evident in the firm’s pursuit of Argentina over defaulted bonds, the fund also picked its target so that even Plan B stood a good chance of proving profitable. Flightier would-be activists could learn from that.

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BMC Software on May 6 said it had agreed to sell itself to a private equity group led by Bain Capital and Golden Gate Capital for about $6.9 billion, or $46.25 a share. The price represents a 2 percent premium to the closing price on May 3, the last day of trading before the deal was announced.

In January 2012, Elliott Management became the biggest shareholder in BMC with a 9.6 percent stake. In May last year the activist fund presented its case for why the software company should be sold. Elliott then launched a proxy fight. Under an agreement between BMC and Elliott announced in July, the company expanded its board, giving two seats to Elliott’s nominees.

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