BMC's Savvy Purchase of BladeLogic

Shares of BMC Software (BMC - commentary - Cramer's Take) took a minor hit last week after the company announced it was buying BladeLogic (BLOG - commentary - Cramer's Take). BMC's shares have subsequently bounced around in the low $30s, as investors wrestle with the seemingly pricey purchase price of more than 100 times Bladelogic's projected 2009 earnings.

I think investors should look past the deal to BMC's attractive valuation and strong fundamentals.

BMC's software helps companies more efficiently manage their mainframe computer systems. The company competes with IBM (IBM - commentary - Cramer's Take), Hewlett-Packard (HPQ - commentary - Cramer's Take) and Computer Associates (CA - commentary - Cramer's Take).

BMC had a lower growth profile than many investors seek from tech stocks. The BladeLogic acquisition should help, as that company operates in the more attractive data center automation corner of that universe.

While the initially negative market reaction gives the impressions that BMC overpaid for BLOG, I'm not so sure.

The $800 million purchase price is approximately 14% of BMC's enterprise value, and BladeLogic should add about 6% to BMC's 2009 revenue. However, BladeLogic is growing nearly 40% annually, compared to just 5% expected growth in BMC next year. By my calculations, it increases BMC's revenue growth rate by 180 basis points, which should have a significant impact on valuation models.

What's more, I think there were signs that BMC's growth was due to accelerate on its own. Deferred revenues had declined slightly over the past nine months, which can act as a drag on revenue growth in future periods. But license sales are up 13.5% so far this year, compared to total growth of less than 9%. Today's license sales should increase future maintenance and service revenues.

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At the time of publication, Trent had no position in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.