NEW YORK (The Deal) -- The $5.3 billion leveraged buyout of Informatica (INFA) by Permira and Canada Pension Plan Investment Board demonstrates again the intense interest in enterprise software shown by a nexus of private equity firms and activist investors.
Chairman and CEO Sohaib Abbasi has been under increased scrutiny since late January, when Paul Singer's Elliott Management Corp. filed a 13D, questioning Informatica's valuation. The Deal identified the company as a potential activist target last October.
The buyout has drawn comparisons to Vista Equity Partners's $4.2 billion purchase last year of Tibco Software Inc., in which activist Praesidium Investment Management Co. LLC. had taken a position. Elliott had also amassed stakes in Compuware Corp., which Thoma Bravo acquired for $2.5 billion, and BMC Software Inc., taken private by Bain Capital Partners LP and Golden Gate Capital LP for $6.9 billion.
"All of the world of legacy infrastructure software is in play at this point," said Stifel, Nicolaus analyst Tom Roderick. The growth of the cloud computing and the potential for stable cash flows through the software-as-a-service billing model has increasing appeal to buyout firms.
Permira partner and technology co-head Brian Ruder cited Informatica's "ongoing transition to cloud and subscription-based services," in a statement announcing the deal. Canada Pension Plan's Mark Jenkins explained that the company has a "stable base of recurring revenues and strong potential for future growth." While Informatica's cloud services are expanding, compressed margins during the transition to new models had complicated life as a public company.
Informatica generates about $1 billion in sales of software that integrates and manages data from different sources within corporate systems. While the company's products might have fit within a rival software group such as Oracle (ORCL - Get Report), industry watchers saw a buyout as the most likely outcome. Most of Informatica's sales come from legacy software, and many tech groups have been focusing on cloud services.
The LBO translates to 17.4 times fiscal 2015 Ebitda and 7.9 times recurring revenue, Roderick said, in-line with Tibco's numbers.
Citrix Systems (CTXS - Get Report) is also in transition, Stifel analyst Brad Reback suggested in a Tuesday report. The company is developing cloud products such as WorksSpace, which allows remote access to applications and data; and Netscaler, which improves delivery of mobile applications.
With the sale of Informatica, attention shifts to Citrix, which Reback values at about 4.5 times 2015 sales. Citrix traded around $63.50 on Tuesday. At Informatica's takeout price, Reback wrote, Citrix would be worth $110 per share. If management does not hit its targets, the analyst wrote, "we expect activist investors could once again start circling."
Evercore analyst Kirk Materne noted that software developers such as PTC (PTC) , CommVault Systems (CVLT - Get Report) , Blackbaud (BLKB - Get Report), Cornerstone OnDemand (CSOD - Get Report), Teredata (TDC - Get Report), Dealertrack Technologies (TRAK) and MicroStrategy (MSTR - Get Report) all trade below historical takeout valuations. "The next question this morning is likely, 'Who's next?'" he wrote in a Tuesday report.
While not likely, Informatica itself could draw another bid, Stifel analyst Roderick suggested. Permira and Canada Pension Plan seem inclined to back Informatica's growth initiatives in areas like cloud computing, data security and integrating data in cutting-edge analytics, based on the statement Tuesday.
A more traditional, "slash-and-burn" style private-equity suitor could reduce costs to boost near-term operating margins.
"You could argue that if you don't sign up for all of those plans of growth, there is an opportunity to unlock 800 or 1000 basis points of Ebitda margin expansion," he said.
In the more aggressive scenario, Roderick suggested a private-equity firm might bid $50 to $52 per share. That may be too small of a premium to unwind the existing deal, which has support from Informatica's board. As the recent transactions reflect, however, private equity has a growing appetite for enterprise software.