SunGard has agreed to a sale of the company to a consortium of seven financial parties for approximately $11.3 billion. SunGard developer software for the financial sector, including solution that do transactions at stock exchanges and back and disaster recovery.

The deal is noteworthy because buyouts are rare in the high tech sector.

A buyout is a deal where a financial party such as a bank or venture capital investor acquires a company. Such deals typically use highly complex financing constructions relying on bonds heavily. In SunGard's case the investors put up $3.5 billion in cash while taking out a $7.8 billion bond. The investors thereby create a leverage: if they sell the company for 13 billion, they only play $7.8 bn to the bond holders, keeping 5.2 bn to themselves (making for a cool 49 pct profit margin).

Buyout deals usually make sense when a company is underperforming due to an outdated strategy or heavy debt burden. By creating some new momentum, the buyout firms are able to do the necessary restructuring and kill loss making parts of the business. Eventually they'll achieve a return on their investment by selling of the company piecemeal, as a whole or by taking it public.

Traditionally buyouts take place in the manufacturing and retail sectors. Companies in such sectors have very stable revenue streams, minimizing the risk for buyout firms. Because the high tech sector is characterized by volatile revenues, buyout firms traditionally have shunned this area of the economy.

That's why the big question is: does the SunGard deal signal a growing up of the software space, readying it for more and similar deals in the future? Or is SunGard the odd duck, the one company in this high tech industry that is an attractive target for a buyout?

It could be that it's Easter Monday, or that SunGard is just one of the most boring companies in the software industry, because it seems that very few industry analyst firms cover SunGard. The most likely reason for it being so quiet from the industry analyst front is that buyout deals are so uncommon in this industry that no-one seems to know what to make of this one.

Computerworld seemed to be the only publication that found someone to comment on this story:

"These private equity firms are not looking to make this huge investment in the company just so that it can carry on the way it is," Octavio Marenzi, managing director of financial consultant Celent Communications told the publication. "The only thing that applies is breaking this company up and selling it off."

28 Mar 2005