Berlin, Düsseldorf According to financial circles, Germany’s second largest software manufacturer Software AG is examining strategic options including a sale, but has so far only met with cautious interest. The business of the company, which is listed in the MDax and has a market capitalization of 2.7 billion euros, has been treading on the spot for years.
A new investor or even majority owner could provide new impulses for the strategy, so the hope. With the help of the investment bank JP Morgan, Software AG has therefore been in contact with investment companies with a software focus, such as Advent, Permira, Francisco Partners, Thomas Bravo and TA Associates, since the summer.
These private equity firms, which usually support rapidly growing software companies with capital and expertise, have declined, however, said several people familiar with the matter. In a second step, Software AG is now sounding out whether other financial investors such as CVC, EQT, KKR, Silver Lake or Hg are interested in a deal. No one has yet made an offer.
The attitude of the foundation of the company founder Peter Schnell, which holds 31 percent of the shares, remained unclear. Software AG, JP Morgan and the foundation as well as the financial investors declined to comment or were initially unavailable.
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Software AG is the second largest software house in Germany after SAP. But while other software companies have enjoyed strong popularity on the stock exchange in recent years, the rating for Software AG has not developed particularly well. Compared to the price at the beginning of 2018, the valuation is now more than 20 percent lower. When the Bloomberg news agency and the Handelsblatt reported for the first time last week about Software AG’s plans to sell, the price rose by more than eight percent, but then fell significantly again.
Skepticism among shareholders
When it announced the latest quarterly figures, Software AG was below analyst expectations. In the core Digital Business division, analysts had expected incoming orders to rise by 14.7 percent. However, after adjusting for currency effects, bookings only increased by around six percent.
For comparison: the cloud business has become the most important growth driver for rival SAP. In the third quarter alone, incoming orders rose by 24 percent.
The investment bank Barclays also sees the talks about a sale in this context: It appears as if the company is taking a proactive step, according to an initial assessment. This may confirm the assumption that business is not developing fully according to plan. There are risks for the digital division both in the coming year and beyond.
However, management promises that growth will accelerate in 2022. By 2023, sales are expected to rise to one billion euros and the operating margin to 25 to 30 percent. In the two to three years thereafter, sales of 1.5 billion euros are possible, said CEO Sanjay Brahmawar at the capital market day in February.
Shareholders, however, view Software AG with some skepticism. The group has repeatedly disappointed expectations in recent years. There is definitely potential for price increases: Analyst Knut Woller from Baader Bank expects growth to pick up in the new year and thus improve margins.
What options exist
Should Software AG actually get a new owner, there would be several options. On the one hand, a withdrawal from the stock market could make the transformation easier, as management would then have to pay less attention to the capital market. An example of such a strategy was provided in the past by the PC manufacturer Dell, which is now listed on the stock exchange again.
On the other hand, a split would also be conceivable when selling to a strategic investor. Software AG has two divisions: The Adabas & Natural database business is very profitable, but is shrinking in the long term. The Group bundles future technologies that promise growth on the Digital Business Platform.
Last but not least, Software AG could benefit from a merger with a large corporation in order to assert itself in the highly competitive software market – the MDax company has well-known competition in many product categories.
The inclusion of a minority investor could also bring about radical changes. Private equity firms have sharpened their strategy at companies such as Springer, GfK and Ottobock and made capital available for expansion. At GfK and Ottobock, the exit of the financial investors is due to come, with substantial returns.
More: Software AG examines multi-billion dollar sale