In early September, the private equity firm Thoma Cressey Equity Partners agreed to buy Embarcadero Technologies (NASDAQ:EMBT) for $234 million, or $8.38 per share. But now, both parties say the deal is off (no termination fees will be paid). As a result, the stock price plunged 17% to $5.80, and you can expect the stock to languish for some time.

Embarcadero looked like a good candidate for a buyout. The company has a solid business in strategic data management (SDM), which helps customers get better value from the databases offered by firms such as Oracle (NASDAQ:ORCL), IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Sybase (NASDAQ:SY). The buyout price was also reasonable, at 2.3 times revenues, and the company's cash flows were attractive.

However, when the company reported its third-quarter results, things were not so rosy. Revenues increased $0.07% to $14.9 million, and license revenues fell from $7.1 million to $6.4 million. License revenues are important since they generally lead to ongoing maintenance and services fees.

Something else: Like many other tech companies, Embarcadero announced that its audit committee found evidence of stock option backdating (from 2000 to 2005).

Interestingly enough, Thoma Cressey Equity Partners did not provide the rationale for dropping the deal. Bear in mind that the firm signed a confidentiality agreement and is privy to internal corporate details.

Besides, if you read Embarcadero's most recent proxy statement, you'll discover there was little interest from other suitors. The company's financial advisor, Morgan Stanley (NYSE:MS), contacted nine potential buyers. None made an offer.

All in all, this is a nightmare for Embarcadero. Management's desire to go private should indicate the company's unease about the future. What's more, investors are justified in speculating that Thoma Cressey Equity Partners uncovered other problems that have not been disclosed -- or saw a quick deterioration of the operations.

Foolish investors would be best advised to do what Thoma Cressey Equity Partners did: Walk away.

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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 834 out of 17,896 in Motley Fool CAPS.