Why Is Billionaire Paul Singer Getting Deeper Into BMC?
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Billionaire investor and hedge fund manager Paul Singer continues his push for the sale of BMC Software (NASDAQ: BMC). Singer, via Elliott Associates and Elliott Management, now owns 13.69 million shares, or 9.6% of BMC, making Elliott and Paul Singer BMC's largest shareholder. The recent purchase is a 8.6% increase in shares from the 12.6 million Elliott owned at the end of the third quarter. Singer began using his funds to build a sizable position during the second quarter of 2012, and at the end of the third quarter had over 17% of his 13F assets invested in the company.
BMC is a provider of IT solutions for cloud computing. Elliott has been pressuring BMC to sell all or parts of its business. Back in October, it was reported that buyout interest was coming from KKR and TPG Capital. Recent news shows that BMC has been in talks with Bank of America about brokering such a deal. Elliott has noted that potential buyers could include industry players like Oracle and private equity firms.
BMC's recent earnings announcement pushed the company down 10% on lowered EPS guidance for 2013, but investors may well be able to use the pullback as a buying opportunity. BMC posted EPS of $0.99 compared to $0.93 for the same quarter last year, but the expected fiscal year 2013 EPS forecast missed analysts’ estimates. BMC now expects EPS to come in at a range of $3.35 to $3.45, which is less than BMC’s prior forecast of $3.49 to $3.59 and below consensus estimates of $3.56.
Compared to other major software providers, BMC trades well in line with its peers:
The price to earnings multiple does, however, rank on the low end of BMC's five-year average P/E trading range -- a low of 12.7 to a high of 23.2. With potential buyout speculation, and the company's exposure to one of the fastest growing tech industries (cloud computing), the case can be made that BMC deserves to trade at a higher multiple. This case is only further strengthened when looking at its expected growth:
All of these companies are looking to make cloud computing a bigger part of their businesses. One of the big potential benefits to buyers is that BMC offers a lot of exposure to the cloud market. This includes BMC's continued partnership with CRM leader Salesforce.com. Intel, meanwhile, is betting on the Government's adoption of the cloud, and International Business Machines (NYSE: IBM) on social cloud services. Other major tech giant Microsoft (NASDAQ: MSFT) has managed to position its suite of Office products as a cloud focus, with Businessweek dubbing the Office as "software for the cloud."
CA Inc (NASDAQ: CA) offers enterprise IT management software and solutions. The tech company also took a hit when it lowered its 2013 guidance, and the stock is down over 5% over the last twelve months. Yet, much like BMC, the company should perform well over the interim given its exposure to cloud computing, although with a $11.4 billion market cap it might not be as enticing a buyout candidate as BMC. The demand and acceptance for cloud services should only grow in 2013; for its 2013 cloud predictions, CA notes had this to say:
As case studies of the benefits of cloud are beginning to surface in even the most conservative and security conscious of domains such as healthcare, government, and accounting, its benefits are certainly becoming much more broadly understood.
Splunk (NASDAQ: SPLK) is another tech company collecting data and enabling for searching and monitoring that could also be ripe for a buyout. Since the company's April 2012 IPO, the stock is down over 5% and trades with a $3.3 billion market cap. Earlier this year it was reported that IBM may well be interested in purchasing the company. James Gilman of Drexel Hamilton believes that Splunk could go for upwards of $4 billion.
Don't Be Fooled
BMC trades with a $6 billion market cap, whereas potential acquirers are flush with cash--Microsoft with over $68 billion on hand, Oracle $33 billion, and IBM $11 billion. As far as potential BMC valuations go, in applying an 18 price to earnings multiple -- mid-range of its 5-year P/E trading range -- to the 2014 (ending March) EPS estimate of $3.87, and the upside in this back of the napkin valuation is upwards of 65%. In looking back the second quarter of 2012, billionaire Singer stated in his letter to BMC shareholders that there were multiple pathways for unlocking shareholder value, but these have yet be uncovered. I take solace in Singer's recent purchase, but fear that without a buyout the performance will remain lackluster for the stock, at best, so buyer beware.
mhargra has no position in any stocks mentioned. The Motley Fool owns shares of BMC Software, International Business Machines., and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!