Why Shares of CA, Inc. Are Soaring Today

A rumor of a potential buyout has perked up the stock.

Timothy Green
Timothy Green
Jun 21, 2017 at 12:49PM
Technology and Telecom

What happened

Shares of enterprise software company CA, Inc. (NASDAQ:CA) surged on Wednesday after Bloomberg reported that a transaction was being considered to take CA private via a merger with privately held BMC Software. As of noon EDT, CA stock was up about 14%.

So what

A deal for CA would be quite the undertaking; with the company valued at about $15 billion, a hefty premium is likely to be necessary. According to Bloomberg, the two companies have approached banks about financing the deal, but the talks are still at an early stage.

A CA presentation

Image source: CA, Inc.

CA generates most of its revenue from mainframe software. Mainframe solutions revenue was $535 million in fiscal 2017, compared to $400 million from enterprise solutions and $77 million from services. There are major switching costs associated with mainframe systems, meaning that CA's mainframe customer base should be fairly sticky. Mainframe solutions operating margin was 59% in fiscal 2017, compared to just 1% for enterprise solutions.

CA's revenue growth has been sluggish -- essentially flat in fiscal 2017 -- but the company is highly profitable. Prior to Wednesday's gains, the stock traded for just 17 times 2017 earnings. Combining with BMC could help restart growth.

Now what

A deal is far from guaranteed, especially since this would be one of the largest leveraged buyouts in technology since Dell was taken private in 2013. CA's base of mainframe customers is likely what's attracting BMC to the company.

As always, buying a stock due to acquisition rumors alone is a risky move. If the deal falls through, shares of CA could tumble.