Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Leveraged buyouts of software companies have continued in steady fashion in recent years, but 2016 could begin with a hiccup. 

Mixed Progress
The software maker's stock had fallen 12 percent in the 12 months before deal speculation surfaced.
Source: Bloomberg

That could put Progress Software in a precarious position. The maker of business software has gained roughly 11 percent this week, helped by a Reuters report that it has spoken to a select group of private-equity firms about a deal. 

Such talks make sense: Before the news, Progress was trading at an enterprise value of roughly 7.4 times Ebitda, a decent discount to the industry average of around 9.1 times and less than half the valuation of recent software buyouts, according to data compiled by Bloomberg. The company also has attributes that make it a good candidate for a leveraged buyout: minimal debt, recurring revenue and strong free cash flow.

Bargain Buyout
Progress Software is glaringly cheap based on its Enterprise Value/Ebitda multiple.
Source: Bloomberg
*Stock has been delisted following a leveraged buyout **Pending leveraged buyout

A potential sale of the company is helped by the fact Progress CEO Philip Pead and CFO Chris Perkins have a history of dealmaking. Pead and Perkins held the same roles at healthcare software company Eclipsys when it was sold to Allscripts Healthcare Solutions. Before that, they held the same roles at Per-Se Technologies when it was sold to McKesson. 

It also doesn't hurt that Progress is arguably more appealing to a buyer than it was previously: Since 2011, it has sold non-core assets in six separate deals and announced $550 million worth of buybacks, according to data compiled by Bloomberg.

But it's a bad time for software buyouts. Financing appears to have dried up, and debt investors are about to be tapped by banks for a raft of technology deals, including Dell's purchase of EMC and pending buyouts of Symantec's data-storage business Veritas, network-management software maker Solarwinds and risk-management software provider Solera Holdings.

Banks, facing losses due to the very real chance they'll need to offload some of that debt at a discount, are wary of backing any new deals until the market shows signs of improvement.

The prospect of a deal has put a floor under Progress -- but there's a chance that floor is more like a trapdoor.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net