BMC Software, Compuware and now Tibco: Why are more and more software companies being taken over by private equity?

Private equity investors have got their eyes set on under-performing companies in the software sector

When BMC Software was acquired by a duo of private equity companies in 2013, it was an eye-opener, but little more. But then this summer Compuware, too, fell into the hands of private equity, quickly followed by Tibco.

All of the three software companies could boast multi-billion-dollar turnovers and were profitable. Yet not only were their management teams all too happy to agree a takeover deal with private equity, rival software suppliers didn't exactly rush forward to make a counter-bid either - not even Computer Associates, a company that in the past wouldn't hesitate to pick over the bones of a well-established rival.

The question is, why the sudden apparent interest of private equity in software and are more such deals on the way?

For Compuware, big changes had already been on the cards. Prior to the bid from Thoma Bravo, which ought to be completed by the New Year, the company had plans to float off the Covisint automotive industry exchange, and split the Dynatrace application performance management tools division from the mainframe tools, which would retain the Compuware name.

According to John van Siclen, general manager of Dynatrace, the kind of software companies that private equity is preying on all share some similar characteristics.

"They are typically of a certain age. If the company was started within the last 10 or so years, it probably wouldn't be taken private. But if the company was started 20 or more years ago, there's plenty of scope for modernisation and improving efficiency," said van Siclen.

Compuware itself is a 40-year-old company with a major legacy mainframe tools business that has been in slow decline since the end of the 1980s.

On top of that, its growth in the 1990s had been fuelled by "year-2000 bug" services that ran out of traction not long into the new millennium, for obvious reasons. The subsequent growth of application performance management tools, by both acquisition and organic growth, has not been sufficient to replace those two areas of decline.

Enter Thoma Bravo

But software is not new to private equity. Indeed, software has actually been on the radar of Thoma Bravo, the private equity company that acquired Compuware this summer for $2.5bn, for a decade. It already boasts a portfolio of software companies that includes Tripwire, Sailpoint, Landesk Software, Hyland Software, Embarcadero and Attachmate, among others.

Its strategy is classic private equity: to identify and acquire under-performing companies, strip out their costs and either return them to the stock market or sell them to a rival in a private sale. It also, on occasion, conducts mergers, such as the mergers of logistics software companies JDA and Manugistics in 2006, which was subsequently returned to the Nasdaq stock exchange in 2009.

That commitment to conducting some radical surgery on companies is one of the reasons why the Compuware deal has been strongly backed by van Siclen, whose application performance management software and services division represented the largest of Compuware's two big divisions, alongside its mainframe tools business.

Van Siclen is looking forward to a two-fold transformation for Dynatrace following its formal separation from Compuware.

"What we need to change now is the finance, IT and human resources infrastructure - the 'G&A', if you like. It's very expensive [at the moment], accounting for between 18 and 20 per cent of revenue when for software companies it should be more like nine to 10 per cent of revenue," said van Siclen.

"It's harder to do that when you are in the public spotlight. You can make no mistakes and it would take us, as a public business, 18 to 24 months to do this. As a private company under Thoma Bravo, we can do it much faster - in 90 to 180 days – with less risk and much more aggressively in terms of the changes we make to drive efficiency and improve agility," added van Siclen.

At the same time, van Siclen is also looking forward to the emphasis on application performance management under Thoma Bravo that, he said, will see a slew of new technologies emerge.

"We have about 600 research and development professionals in five different labs around the world... We have a number of things coming that are game changing, which will re-define the application performance management space," he added.

Chris O'Malley, van Siclen's counterpart at Compuware, overseeing the mainframe tools, takes a similar view: he is looking forward to speeding-up the development cycle so that it will be able to make multiple releases every year.

This, he says, is possible at Compuware using agile development techniques because it retained an in-house development team in its Detroit headquarters, while rivals outsourced their mainframe tools' product development in a bid to save money while the market stagnated.

Another of the changes instigated by Compuware's acquisition by Thoma Bravo, of course, is the spin-off to shareholders of Covisint, the automotive industry exchange it picked up in the aftermath of the last dot-com crash in 2004. Compuware had, in part, acquired it simply because it was located in Detroit, Michigan where Compuware is headquartered, said van Siclen.

The application performance management division, meanwhile, has been rebranded Dynatrace, after one of the companies acquired by Compuware in 2011.

That also includes the Gomez software-as-a-service suite of tools that runs on Dynatrace's APM platform, used to optimise performance of web, mobile, streaming and cloud applications.

Dell boy goes private, too

The desire to perform radical business transformation away from the critical and fickle eyes of stock market investors was also one of the justifications of Michael Dell's decision to take Dell private in October 2013, with a little financial help from private equity firm Silver Lake Partners.

It is also the justification of Bob Beauchamp, the CEO of BMC Software. "I do not miss being [the CEO of] a public company: spending probably one-third of my time on the road talking to shareholders, reacting to earnings-per-share reports... We can invest money in a quarter even if the revenue is not as good as expected. If you're a public company, you can't do that, you have to wait," Beauchamp told Computing last year, shortly after taking the company private with private equity firms Bain and Golden Gate Capital.

Time will tell whether these recent private equity acquisitions prove successful for the companies involved. What is almost certain, though, is that the private equity companies themselves will do well financially, regardless of what happens to the software companies.