Frankfurt Sanjay Brahmawar has been talking about changes in one form or another ever since he became CEO of Software AG five years ago. The company from Darmstadt has a profitable but stagnating business – which is not particularly impressive in an industry that is constantly growing due to the digitization of the economy.
Now, however, a change is imminent that is likely to be more far-reaching than all the strategic reorientations of the past. The financial investor Silver Lake, which is already a major shareholder, wants to take over the software manufacturer completely. The board around Brahmawar supports the plan, as does the foundation of founder Peter Schnell, which wants to sell 25.1 percent of its shares and keep only five percent.
Silver Lake is offering 30 euros in cash per share. That is a premium of 53 percent on the closing price on Friday and corresponds to a company value of 2.2 billion euros. The investment company wants to take the MDax group off the stock exchange after the takeover if it reaches the minimum acceptance rate of 50 percent and the authorities approve the deal.
Disappointing future business
Software AG CEO Brahmawar welcomed the company’s “prospect of a deeper strategic partnership with Silver Lake.” The financial investor has “already demonstrated strong support for our strategic vision and our values”. Together they want to accelerate the implementation of the strategy. It is the tacit admission that one of the largest German software manufacturers cannot do it alone.
Software AG was founded in Darmstadt in 1969, when mainframe computers were becoming more and more widespread in business. Adabas, a system for database management developed by co-founder Peter Schnell, soon became the most important product – it is still used today with updates.
The business is solid, in 2022 it even grew by 15 percent to 246 million euros, with a margin of almost 70 percent. In view of the changes in the IT world, in which mainframe computers are being used less and less, the company expects demand to fall.
In view of this trend, the management has invested the lavish profits over the years and in changing occupations in order to open up a number of new business areas – these include programs for the networking of machines, the automation of business processes or the integration of various IT systems.
But what is summarized in the Digital Business Platform segment as supposed future business is developing worse than hoped. The group has repeatedly missed the goal of increasing sales to the level of one billion euros for the first time since 2011. Even Brahmawar has not been able to change that with his “Project Helix” strategy. The market capitalization shows it: Many a start-up that has never made a profit is valued higher.
In addition, the conversion of the business model is taxing the patience of the shareholders. As is common in the industry today, Software AG wants to market the products via subscriptions from the cloud. Regular fees take the place of one-off license income. In the start-up phase, however, this weighs on sales and profits.
High investments required
Silver Lake is a big name in the technology sector. The firm has $90 billion in assets under management. It recently announced that it would buy market leader SAP from online market researcher Qualtrics. Egon Durban’s fund at the PC manufacturer Dell has proven its skill in realigning companies.
Silver Lake has also had an impact on Software AG. The announcement states that the financial investor is providing support in key areas of the transformation: focusing on cloud services and products for data integration, converting the business model to subscriptions, and planning acquisitions.
Now the investor from Silicon Valley wants to get the right of access to the software manufacturer in Hesse – and make advance payments for this: In the announcement, the company emphasizes the “multi-year and investment-intensive value creation” – shareholders could secure this in advance with the offer.
This begs the question of what Silver Lake is planning once the deal is finalized. As a result of the agreement, no significant changes to business activities and locations are planned, Brahmawar wrote to employees in an internal email. In company circles, however, it can be heard that a precise analysis of the business areas and a focus on lucrative areas are already being called for.
The two Silver Lake representatives on the Supervisory Board of Software AG are also likely to have had a say in the recent job cuts. Around 200 of the 5,000 employees have to go so that the running costs fall – and the company increases its recently disappointing margin.
It is now up to the shareholders to decide on the offer. Software AG’s management will promote the deal at an investor conference on Monday.
More: Get out of the value trap: How Silver Lake finally wants to put Software AG on course for growth