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.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Private equity firm Thoma Bravo has been among the most active buyers of software companies in the last couple of years. And now it has even bigger guns to go hunting, with a new $7.6 billion fund

Last year and so far in 2016, Thoma Bravo and other private equity firms have struck $48 billion worth of software deals -- the biggest buyout splurge in years -- and the industry has become a favorite of PE shops. Many of these deals -- though not all of them, in a recent shift of private equity strategy -- have been for an older generation of companies that still generate steady fountains of cash but whose best days are behind them.

With an eye on Thoma Bravo's fresh pile of cash, we've made a shopping list. The potential targets are largely in Thoma Bravo's wheelhouse of software companies with revenues of $50 million to $500 million that can be themselves used as a platform for acquisitions.

Going Shopping
In a surge of private equity buyouts in the software industry, PE firms have struck $19 billion worth of software deals so far this year
Source: Bloomberg Intelligence

PTC

This $5 billion software maker’s shares are at a 16-year high, but it’s arguably not as expensive as it could be, at an enterprise value to revenue multiple of 4.7. It also has a low level of debt, which is attractive for any would-be buyout of its size. Private equity firms generally enter deals with an eye on the exit, and here, they'll be hoping to find a willing buyer in an industrial company such as GE or Honeywell. The latter was said to be interested in JDA Software, which focuses on supply-chain software, which is one of PTC's many products.

Staging a Recovery
PTC is trading at its highest level since 2000, but a private equity firm could still salvage value in a leveraged buyout, in part because the firm is saddled with little debt
Source: Bloomberg

Tableau Software

It would have been impossible to imagine Tableau as a private equity target as recently as 2014, when it was a darling of public company investors and traded at about 25 times trailing revenue. Not anymore. A damaging earnings stumble in February capped a shift of investor sentiment about the maker of data analysis software. Its enterprise value is now less than five times its revenue for the last 12 months, and close to four times its estimated 2016 revenue. Tableau could use some PE-imposed discipline on its spending, and it may need shelter from public markets as it shifts to software delivered over the Web. 

Crashing to Earth
Tableau Software was valued at a rich 25 times revenue in 2014. After some earnings stumbles and a change in investor sentiment, the software firm now trades at less than five times its revenue.
Source: Bloomberg

RingCentral

So many Thoma Bravo deals have been driven by activist investor Elliott Management (think Qlik, Riverbed Technology, Compuware -- the list goes on). One of Elliott’s newest (but not-yet-activist) positions is in RingCentral, which provides cloud-based software for phone systems at companies including Twitter and BMW. The $1.6 billion company is trading at four times its estimated 2016 revenue and its negative Ebitda isn’t a hindrance to a buyout. We learned the latter point when Vista Equity Partners surprised many with its acquisition of loss-making cloud-based marketing software company Marketo, a deal that closed last month.

Flick the Switch
RingCentral's earnings before interest, taxes, depreciation and amortization are set to turn positive this year. But even if they remain negative, that's no longer an obstacle to a buyout.
Source: Bloomberg

Progress Software

At an enterprise value to Ebitda multiple below 10, the $1.4 billion software maker is still relatively inexpensive, even though it’s climbed 20 percent this year, compared with 5.6 percent for the S&P 500. Its CEO Phil Pead has a track record as a seller: He was the CEO of software company Eclipsys when it was acquired by Allscripts Healthcare Solutions and held the same role at Per-Se Technologies when it was acquired by McKesson a decade ago. Plus, Progress’s biggest shareholder is sometimes-activist investor Praesidium Investment Management, which pushed Tibco Software to explore a sale in which Vista outbid Thoma Bravo.

Still Cheap
A buyout of Progress Software would have been even cheaper six months ago, but its current valuation is still within reach of private equity firms
Source: Bloomberg

Cornerstone OnDemand

Shares of the human-resources software company have more than tripled since its IPO five years ago, and the company's revenue is still growing by 20 percent or more. But it's one of the least expensive stocks among cloud software firms that have its pace of revenue growth. And as a public company, Cornerstone will always be on the wrong end of comparisons to rival Workday, which has nearly double the enterprise value to revenue multiple. Praesidium owns more than 5 percent of Cornerstone's stock.

Unfair Comparisons
Cornerstone OnDemand suffers from comparisons to its more richly valued rival Workday
Source: Bloomberg

The pile of money at Thoma Bravo's disposal also makes a broader point about the tech industry: For a software business, it's fine to be underwhelming or financially rocky because there will most likely be willing buyers. Intel, Hewlett Packard Enterprise, Dell Technologies and Apigee are among companies that sold underwhelming software assets in recent days. 

It's not clear what happens down the line to private equity's growing collection of misfit software toys. PE firms can gussy up their financials and cut costs, but it's hard to imagine many of the buyout targets will become world beaters. That's a problem for another day. For now, it's time to load up the shopping cart. 

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

To contact the authors of this story:
Gillian Tan in New York at gtan129@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net