How private equity giants fight for sovereignty at Software AG

Dusseldorf, Frankfurt Bain Capital heralded the current round in the takeover battle for Darmstadt-based Software AG on Tuesday evening. The financial investor from Boston, which holds the majority in the US database software provider Rocket Software, publicly promoted a merger of the two companies for the first time. At the same time, Bain increased its offer for Software AG by two euros to at least EUR 34 per share, which corresponds to a valuation of EUR 2.5 billion.

On the other hand, Silver Lake from the American Silicon Valley confirmed its own offer of 32 euros the next morning. Silver Lake reiterated its assessment that its own offer is attractive and has full support for Software AG’s strategy and guarantees independence for the German company, which has struggled with problems in recent years.

Software AG itself, the second largest German software manufacturer after SAP, described the Silver Lake offer as “in the best interest” of all stakeholders.

Takeover battles for listed companies are rare in Germany. There have only been three major cases in the past five years: At the generics manufacturer Stada, the lighting manufacturer Osram and the animal feed dealer Zooplus, there were also some competing bidders.

What has not happened so far is an initial situation in which a bidder already has actual control over the company. Silver Lake already has access to almost two-fifths of the shares, so it can easily block control of Software AG and thus important strategic decisions should Bain win the takeover battle.

It will soon be the shareholders’ turn. After examination by the financial supervisory authority Bafin, the publication of the offer documents from Silver Lake can be expected in the next few days. Bain could submit its own bid. The acceptance period for shareholders is usually four weeks, but can be extended, for example if key components such as the price or the acceptance threshold change. Investors looking to sell will probably wait until the end to see if there’s more to be got.

Silver Lake offers transaction security

The concepts of the two private equity players are fundamentally different. Silver Lake has been with Software AG for around a year and a half and holds two seats on the supervisory board. The investor expressly supports the course of the board of directors around CEO Sanjay Brahmawar.

The management has announced investments in growth areas such as data integration and is also restructuring the business model: Similar to most software manufacturers, Software AG also wants to market software subscriptions from the cloud (Software as a Service, SaaS for short) to a greater extent instead of selling licenses for programs that are permanently installed on computers. It is also a declared goal to expand business in the USA, with the financial investor from Menlo Park, California, to help.

Software Inc

Software AG’s headquarters are in Darmstadt.

(Photo: dpa)

Silver Lake recently bought a 25 percent stake from the Software AG Foundation – most recently the largest shareholder in the SDax group – and also secured five percent of the shares. The announced offer has an acceptance threshold of 50 percent. Silver Lake had already subscribed to a convertible bond last year, with which the investor could get almost ten percent of Software AG – but at a price of 46 euros per share.

>>Listen here: Why private equity is now focusing on the middle market

Silver Lake emphasizes that no further due diligence is required for a complete takeover of Software AG and that the financing has already been fully secured. Silver Lake advertises that it can therefore be implemented without disruption and uncertainty for the company and its stakeholders lasting several months.

The company also says that Silver Lake has submitted a “valid” offer and offers a high level of transaction security. Bain threatens a blockade that could last for months in the worst case. Massive effects on jobs are to be feared.

From the point of view of analysts, the software has a lot of potential for conversion. “Rough diamonds” in the portfolio included the Aris platform for process mining, which companies use to analyze their business processes, the Internet of Things platform Cumulocity and stream sets for the integration of data sources, said Michael Briest from the Swiss bank UBS to the Handelsblatt .

Since 2001, Software AG has spent around 2.1 billion euros on acquisitions – the sum is therefore almost in the same order of magnitude as Silver Lake’s offer. “There may be greater value in the sum of the parts than in the group as a combined entity.”

Rocket emphasizes strategic advantages

Bains Rocket Software, on the other hand, emphasizes the strategic advantages of a merger between the two software companies. Rocket Software and Software AG each had a complementary portfolio of leading products that together could form an ideal foundation for further growth. So-called cross-selling could contribute to this, i.e. the sale of the products of the future partner to your own customers. “A merger would enable both companies to accelerate innovation,” the company said.

Unlike its German rival, Rocket Software has managed to transform itself into a SaaS player. With around $400 million in operating income (Ebitda), Rocket could be valued at over $8 billion in a merger, so Software AG would be very clearly in the junior role.

At the same time, Rocket tried to allay related concerns. The vision is a merger that protects the identity and culture of both companies. Management is committed to investing “significantly” in the new company’s people, technology and capabilities, according to the advertising message.


Rocket Software wants to pay at least 34 euros per share, but first carry out an audit. If Silver Lake and the Software AG Foundation support a merger, the price would even increase to 36 euros. In this case, the minimum acceptance threshold is 62.5 percent of the share capital – this would make a domination and profit and loss transfer agreement possible.

>>Read also: Software AG takeover battle – Bain outbids Silver Lake

In the event that Silver Lake and the Software AG Foundation maintain their rejection, the acceptance threshold is 40 percent. Rocket Software would then play the role of “supporting anchor shareholder,” it said.

From the point of view of some investors, the actions of Silver Lake and the Software AG board raise questions. Software AG should have organized a structured sales process instead of approving the hastily arranged sale of a 25 percent stake in Silver Lake, critics said. The sale to Silver Lake may only have been initiated after Bain expressed interest. Software AG and Silver Lake have denied this.


According to Morgan Stanley analyst Alastair Nolan, it’s unclear how Software AG’s board and takeover committee evaluated the merits of each offer.

How the situation will end is unclear. As Gregory Lafitte, an analyst at Tradition, explained, “Either Silver Lake needs to increase its supply in response to pressure from Bain, or Bain and Silver Lake need to reach a mutual agreement, although that doesn’t appear to be the case at this point.” A joint approach would be the online pet food retailer Zooplus, in whose takeover the financial investors Hellman & Friedman and EQT initially outbid each other and ended up bidding together.

The current situation could block Software AG for months and attract free riders. According to financial circles, activist investors are observing the situation – as was the case in the takeover battle for Stada, when Elliott got involved and ended up raking in a lot of money.

More: Comment – ​​The bidding war is a great opportunity for Software AG

source site-12