CA: Following BMC Into the Arms of Private Equity?
For computer software warhorse, CA Inc. (CA), the outlook is overcast, due to the cloud. CA, based in Islandia, N.Y., thrives on milking its installed-base customers, providing software, maintenance and upgrades to a large number of government and corporate data centers. As those enterprises move infrastructure to the cloud, CA loses reliable business and is forced into competitive bidding situations to hold onto the customer.
But that may not be all bad for investors. Its smaller analogue, BMC Software (BMC) of Houston, announced May 6 that it had agreed to be bought out for $6.9 billion by a group of private investors led by Bain Capital and Golden Gate Capital. The price was about 13% above the company value on March 4 when Bloomberg reported it was drawing takeover interest.
With a current market cap of $12.3 billion, CA would represent a more challenging target. But many of the fundamentals that make BMC attractive for private equity firms also exist at CA. It has steady cash from operations, limited debt and a broad customer base. In March, Merrill Lynch analysts spotlighted CA as a potential leveraged buyout.
CA, which used to be called Computer Associates International, has a checkered history. Its former CEO is in federal prison for a $2.2 billion accounting fraud; a pliant board once arranged $1 billion in stock payouts to insiders. But it has spent the past nine years rebuilding its reputation.
Unfortunately, it has had scant success in building growth. Revenue and income at CA have improved steadily over the past five years, but they haven’t improved very much.
CA’s steadiness should make it attractive to private equity buyers. It looks as if it would be able to reliably pay off interest costs private equity firms might load on. It had $2.77 billion in cash and short term investments at the end of the fiscal year March 31, and only $1.29 billion in debt.
CA is confident enough that it started paying a 25-cent quarterly dividend last year. It currently amounts to about a 33% payout ratio, and management affirmed it plans to continue the dividend this year. The dividend yield is about 3.7% right now.
But growth remains problematic. Revenue fell 4% last year, with bookings of future business falling 12%. And management forecast that fiscal 2014 revenue will decline by 2% to 4% and earnings per share will fall at least 25%, partly due to a restructuring charge.
Its core business, providing software to help manage mainframe computers, accounts for almost 60% of revenue and a whopping 58% operating margin last year. That business won’t ever grow, because mainframes are a mature market. But it won’t go away very fast either.
More problematic are what CA calls “enterprise solutions” including security software and software that manages varied types of computers from central hubs. That’s a very competitive business, and some of it is migrating to the cloud, where CA offers solutions but doesn’t have a locked-in base. Last year that business had a 3% operating margin.
CA doesn’t have many of the growth attributes that traditional technology investors crave. But it should be appealing to somebody with the appetite and skill for financial reengineering.
Bill Bulkeley, a contributing editor at YCharts, worked for the Wall Street Journal for more than 30 years, covering high tech since the birth of the PC. He also wrote about the Internet and the imaging industry. He has written for Technology Review, Knowledge@Wharton and CIO Magazine. He can be reached at firstname.lastname@example.org.
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