Last month Progress Software Inc. (PRGS) - Get Report rejected an acquisition idea brought to it by an activist at its gate, Praesidium Investment Management.

The technology company said that the proposed acquisition would involve the issuance of an additional 20% of equity, which would dilute shareholders and likely result in a substantial leverage hike.

The activist fund is seeking to have Progress acquire Aptean, an enterprise software firm owned by buyout shop Vista Equity Partners, according to a person familiar with the situation and a Reuters report from September. 

However, a move to have Progress Software issue an additional 20% equity position to help finance a cash and stock Aptean acquisition would likely mean that Vista Equity Partners, one of the leaders in technology acquisitions in the U.S., would retain a large minority stake, as much as 16%. Aptean is a software consolidator, but it and Progress Software would have the advantage of having access to the Vista Equity network.

Vista's successful record of acquiring, improving and later selling software companies allowed the fund recently to raise $10.6 billion for one of the largest U.S. technology-focused private equity funds. The buyout shop's funds have made returns of over 20%, according to Pitchbook. With Vista as a partner, Progress Software could make acquisitions in the software space with the benefit of a private equity adviser that has been successful in M&A.

That is in contrast to Praesidium's calculation that Progress Software wasted about $871 million of shareholder capital between 2003 and 2016 focusing on high-growth-focused acquisitions and internal high-growth efforts. Instead, the activist fund is seeking to have the software firm make acquisitions with a focus as a consolidator of more mature software companies, but ones that could benefit from lower overhead costs.

The insurgent fund noted that one of its suggested board candidates, John Shackleton, was the CEO of OpenText, which was a key pioneer of the software consolidation model.

In many cases, private equity firms obtain board seats to help oversee equity stakes they have in publicly traded firms. A deal to sell Aptean to Progress Software could result in the installation of a PE managing partner from Vista onto the technology company's board, a move that would provide some private equity-style oversight to the company.

Also, it is unclear whether such an acquisition would be dilutive - it would depend on the purchase price. It is also unlikely that Praesidium, as one of Progress Software's largest shareholders, would suggest an acquisition idea that it believed was going to be dilutive to investors.

Nevertheless, people familiar with the situation noted that Praesidium would seriously consider launching a proxy contest to install directors if Progress Software ultimately rejects its demand for substantive change including board representation.

The activist fund has initiated seven campaigns, four of which included letters to management, at six companies since it was founded in 2003. However, it hasn't launched a proxy fight.

The deadline for shareholders to submit dissident director nominees at Progress Software for its 2018 annual meeting is March 19. The firm, which has a $2 billion market capitalization, held its 2017 annual meeting on June 15.

Also, people familiar with the situation noted that some hedge funds, including some activist investors, have begun quietly to accumulate shares in Progress Software, a situation that could ultimately help Praesidium if it were to launch a contest.

Praesidium was launched in 2003 and currently has a concentrated long-only strategy that holds between 13 to 15 investments at a time. The New York-based investment manager, which has $1.5 billion in assets under management, seeks off-the-radar companies overlooked by most of Wall Street, where value can be unlocked.

The fund's managers, including co-founders Kevin Oram and Peter Uddo, engage with management teams at companies that receive Praesidium investments. Before launching Praesidium, Oram headed up technology investing at Sanford Bernstein. Uddo previously worked as a portfolio manager at Viking Global Investors, since its inception in 1999 until 2003. 

About 40% of Praesidium's strategy is allocated to the enterprise software space. The fund has launched activist campaigns on occasion at targeted companies.

Roughly half of the firm's investments in software companies have been sold, including TIBCO Software, JDA Software, and Informatica. Informatica was sold under pressure from both Praesidium and Elliott Management's technology partner Jesse Cohn.

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