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(B)(N) BMC BMC Software Incorporated

March 21, 2013

Deal Book. BMC Software Incorporated is said to be on the block because one of its shareholders, Elliott Management, with a stake of 9.6% and a reputation for being a positive and activist shareholder, thinks that the company should be privately owned or more closely controlled so that it can (to paraphrase) “more efficiently leverage its current customer base into new software, applications and services” and, of course, the investment firm also noted that “there is significant scope to trim headcount and create a more efficient business” (Reuters, March 21, 2013, Exclusive: Buyout firms team up to take BMC Software private – sources).

We don’t know the future but there are a number of reasons that we’re not buying in to this deal even though the stock price is up by a couple of dollars, today, and the trading volume, at more than 6 million shares, is three to five times normal.

Number 1, the firm has never paid a dividend to its shareholders and, therefore, shareholders can only make money by selling their stake to someone else at a higher price, which has happened in the past (please see Exhibit 1 below). For example, it was in the Perpetual Bond™ at prices between $42 and $56 in 2010 through 2011 (Red Line Stock Price (SP) above the Black Line Risk Price (SF)) when we were “stopped out” at $52 and have had no compelling reason to try it again.

Number 2, the shareholders equity is $680 million but net of the goodwill on the books, it is negative ($1 billion) and the debt is $3.6 billion. The “goodwill” is also rather old goodwill and might not be “producible” and, apparently, it isn’t if Elliott Management is correct. Moreover, the total assets of the firm are $4.3 billion, and net of the debt and net of the goodwill, there doesn’t seem to be anything there that is “tangible” and one wonders whether the “intangibles” will be transferable to the new owners if the “headcount” is reduced (please see Number 4, below).

Number 3, at the current stock price of $43 or so, the company has a market value of $6.5 billion and at the current Risk Price (SF) of $38, $5.4 billion, which we would also deem to be the arguably effective “purchase price” from our point of view (please see previous Deal Books in these Posts).

If we had $5.4 billion to spend on an “exclusive investment” like this, and “ownership”, we would at least hope to obtain a reasonable income such as $500 million per year, or 10% of our investment, which is pretty conservative by “investment banking” standards, but last year, on sales of $2.1 billion, $340 million went to the “cost of sales” and $850 million went to “selling, general, and admin” expenses, so that after some other recurring expenses (including income tax for a public company), $400 million was available for the owners, which seems to be cutting it rather close to a “bond” return that we can easily get elsewhere (for example, please see our recent Post, The Dow Transports, March 2013, for some fresher ideas).

Exhibit 1: (B)(N) BMC BMC Software Incorporated – Risk Price Chart

(B)(N) BMC BMC Software Incorporated

BMC Software Incorporated is a software company that provides IT management solutions for large, mid-sized and small enterprises and public sector organizations around the world. Its competitors are firms such as Microsoft, Oracle, IBM  and SAP.

(Please Click on the Chart to make it larger if required.)

And finally, Number 4, the “Coase Dividend” for this enterprise is $75 million and after increasing steadily for several years to $180 million in early 2011, the “Coase Dividend” has been steadily declining to the current $75 million as a consequence of its increasing debt and lack of “production” including significant re-purchase (apparently $2 billion) of its own stock last year.

The “Coase Dividend” is the “balance sheet worth” of all that it’s done in terms of what might be called the “intangibles” of this business (please see Number 2, above).

“In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on. These operations are often extremely costly, sufficiently costly at any rate to prevent many transactions that would be carried out in a world in which the pricing system worked without cost.” – Ronald H. Coase 1960, The Problem of Social Cost, Journal of Law and Economics.

Hence, in our view, the business is declining and a purchase at the current stock price will enrich the current shareholders, but the new owner will need to work hard – or have some compelling ideas – to get their money back. Please see our recent Post, The Coase Theorem & The Coase Dividend, March 2013, for a better understanding of the Coase Dividend.

The RiskWerk Company does not own any of the common stock of BMC Software  Incorporated and has no financial or fiduciary interest in these transactions.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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