Is BMC Software Going Private?

It's not official yet, but it's getting darn close.

As Monday dawned on the trading week, reports began to filter out about a joint bid by Bain Capital (Mitt Romney's old stomping grounds) and Golden Gate Capital to take BMC Software (UNKNOWN: BMC.DL  ) private.

According to Forbes, the private equity powerhouses are mulling a $6.5 billion bid to take BMC private at a per-share price of $46. Other sources, such as on Yahoo! Finance, say a merger agreement has already been signed, but for $46.25.

So the details are still sketchy, but they do appear to be firming up. Here's what we know for sure:

  • BMC earned $329 million in calendar year 2012, on $2.2 billion in revenue.
  • That was more revenue, but significantly less profit -- down 18% -- than what BMC earned in the fiscal year that ended in March 2012.
  • It was even more revenue -- and even more significantly less profit, down 28%, in comparison to fiscal 2011 earnings.

On the other hand, while free cash flow is dropping along with GAAP "earnings" at BMC, these real cash profits continue to run far ahead of what GAAP accounting standards permit BMC to report as its income. The company generated $602 million in positive free cash flow over the past 12 months, or close to twice reported net income.

The big question
So, is this a good deal for shareholders? Assuming the rumored details are more or less correct, I don't think it is -- and I'll tell you why.

$46 a share (or even $46.25) is only a tiny premium to BMC's share price on the market today. True, at three times sales, and a P/E ratio of more than 22, BMC shares do seem to sell for a valuation higher than that accorded rival software firms such as CA (NASDAQ: CA  ) or IBM (NYSE: IBM  ) , both of which carry only 14 P/E ratios. However, BMC's strong free cash flows and modest net debt load mean that at the reported buyout price, Bain and Golden Gate are getting the company for just 11 times free cash flow.

With analysts projecting long-term profits growth of 12% at BMC, that's not just a good price. That's a steal. IBM sells for a higher price/FCF ratio than that, and with slower projected growth. So, too, does CA.

Foolish takeaway
Given the near-giveaway price Bain and its compadre appear to be offering for BMC, a bidding war simply has to break out here. Forbes is suggesting Cisco or Oracle are potential buyers, and they certainly have enough cash to make bids of their own. For BMC shareholders' sakes, we should hope one of them does so, and makes the private equity folks pay a fairer price for BMC.

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