Software AG wants to use Silver Lake Investment for acquisitions

Dusseldorf Software AG wants to accelerate the strategic realignment with an external partner: The US technology investor Silver Lake is investing 344 million euros in the German IT group. The aim is to “make better use of the opportunities in a rapidly growing market,” said Software AG boss Sanjay Brahmawar on Tuesday – also through takeovers.

The investor receives two seats on the supervisory board. Chief Controller Karl-Heinz Streibich, who shaped the company as CEO from 2003 to 2018, is stepping down from his position on January 31. Silver Lake manager Christian Lucas will replace him. Ralf Dieter, CEO of Dürr AG, makes room for the former Red Hat boss Jim Whitehurst.

The shareholders received the announcement with disappointment. Software AG’s share price fell on Tuesday by up to 11.6 percent to 34.16 euros, making the biggest losses in the MDax. According to rumors of sales, the share had risen significantly since the end of November – the hope of a bonus through a short-term deal has now been dashed, judges Knut Woller, an analyst at Baader Bank.

Software AG’s business has stagnated for years despite the digitization of the economy. On the stock exchange, the group is valued low compared to other software manufacturers at 2.5 billion euros. CEO Sanjay Brahmawar has therefore developed a new strategy under the name “Projekt Helix”, through which sales should increase to one billion euros by 2023 – last year it was 834 million euros. The operating margin is expected to improve from 21.2 percent to 25 to 30 percent.

Brahmawar wants to expand the future business in the “Digital Business Platform” division, for example with technologies for the analysis of business processes and the evaluation of large amounts of data and the integration of various programs in an organization. The “Adabas & Natural” database division is highly profitable, but is shrinking in the long term in the age of cloud computing.

With the realignment, a lot has changed in the Darmstadt-based group, technically, commercially and also culturally. The software manufacturer is now primarily marketing its products in subscriptions via the cloud, as is standard in the technology industry today. In addition, the management is trying to bring about a profound cultural change in the 50-year-old organization.

“Confirmation for the strategy”

Software AG boss Brahmawar sees the partnership with Silver Lake as “clear confirmation” of the Group’s strategy, team and growth potential. The financial investor is one of the “best of the best when it comes to growth companies to achieve their potential,” he said. He will take an active role and support the management team.

Founder Peter Schnell’s Software AG Foundation, which holds 31 percent of the shares, supports the partnership. “We are pleased that the team will be involved in the further transformation of the company towards sustainable, profitable growth,” said Schnell. He continues to be “fully behind the strategy and vision of the management team”.

Silver Lake is a household name in the technology sector. The investment company manages assets amounting to 90 billion dollars, its portfolio includes start-ups such as the delivery service Getir, the fintech Klarna and the mobility service provider Flix Mobility, as well as listed companies such as Airbnb, Twitter and Splunk.

Silver Lake is acquiring a convertible bond from Software AG, which bears interest at two percent and is due in early 2027. The investment company can convert the sum into shares at a price of 46.54 euros, a surcharge of 20 percent on the closing price on Friday. This corresponds to around ten percent of the total capital. The management had previously examined several strategic options, including a sale, and hired an investment bank to do so.

Software AG intends to invest the new capital in further growth, not least through takeovers. This year management “built the pipeline”, said Brahmawar – “2022 will be a year for acquisitions”. The group is looking for fast-growing cloud providers who already have a functioning business model.

More visibility in North America

The partnership is not just about capital, emphasized Brahmawar. Silver Lake has great expertise in the technology industry. The name of the partner also gives the software company more visibility, especially in North America – the market that is particularly important for future development. In addition, the investor has experience with the takeover of software providers.

In their initial reactions, the analysts rated the announcement positively. The partnership with Silver Lake is a “tacit admission to have missed business opportunities,” wrote Andreas Wolf of the Warburg investment bank. If a return to the growth path succeeds – even with acquisitions – this will have a positive effect on the share price.

However, shareholders will probably have to be patient. In order for Software AG to increase its market value, it must accelerate growth, including through new business, explained Knut Woller from Baader Bank. The proof that this will succeed has yet to be provided.

More: Software AG is considering a sale – but the interest is limited