Frankfurt Sanjay Brahmawar has been talking about changes in one way or another since he became CEO of Software AG five years ago. Although the company from Darmstadt has a profitable business, it is stagnating – which is not particularly impressive in an industry that is constantly growing due to the digitization of the economy.
However, a change is now on the agenda that is likely to be more far-reaching than all the strategic realignments of the past. The financial investor Silver Lake, which is already a major shareholder, wants to take over the software manufacturer completely. The board headed by Brahmawar supports the plan, as does the foundation of founder Peter Schnell, which wants to sell 25.1 percent of its shares and keep only five percent.
Silver Lake is offering 30 euros in cash per share. This is a premium of 53 percent on Thursday’s closing price and corresponds to a goodwill of 2.2 billion euros. The associated company wants to take the MDax Group off the stock exchange after the takeover, if it reaches the minimum acceptance rate of 50 percent and one share – and the authorities approve the deal.
Disappointing future business
Software AG CEO Brahmawar welcomed in the message of the companies “the prospect of a deeper strategic partnership with Silver Lake”. The financial investor has “already demonstrated strong support for our strategic vision and our values”. Together we want to accelerate the implementation of the strategy. It is the tacit admission that one of the largest German software manufacturers cannot do it alone.
Software AG was founded in Darmstadt in 1969, when mainframes were becoming more and more widespread in business. The most important product soon became Adabas, a database management system that co–founder Peter Schnell had developed – it is still in use today with updates.
The business is solid, in 2022 it even grew by 15 percent to 246 million euros, with a margin of almost 70 percent. However, in view of the changes in the IT world, in which mainframes are being used less and less, the company expects demand to decline.
In view of this trend, the management has invested the abundant profits over the years and in changing occupations in order to open up a number of new business fields – these include programs for the networking of machines, the automation of business processes or the integration of diverse IT systems.
But what is summarized in the Digital Business segment as a supposed future business is developing worse than hoped. The Group has repeatedly missed the goal of increasing sales to the level of one billion euros for the first time since 2011. Even Brahmawar has not been able to change this with his “Project Helix” strategy so far. The market capitalization shows it: many a start-up that has never made a euro profit is valued higher.
In addition, the change in the business model is straining the patience of shareholders. As is customary in the industry today, Software AG wants to market the products via subscriptions from the cloud. Regular fees take the place of one-time license revenues. In the start-up phase, however, this weighs on sales and profit.
High investments are required
Silver Lake is a big name in the technology sector. The company manages assets in the amount of 90 billion dollars. Just recently, it announced that it would buy out the online market researcher Qualtrics from market leader SAP. Egon Durban’s fund at the PC manufacturer Dell has proven its skill in realigning companies.
Silver Lake has also already made an impact at Software AG. The announcement states that the financial investor is providing support in key areas of the transformation: focusing on cloud services and products for data integration, switching the business model to subscriptions, and also planning acquisitions.
Now the investor from Silicon Valley wants to get the right of penetration from the software manufacturer in Hesse – and make advance payment for it: in the announcement, the company emphasizes the “multi–year and investment-intensive value creation” – shareholders could secure this in advance with the offer.
This raises the question of what Silver Lake is planning when the deal is decided. As a result of the agreement, no significant changes to the business activities and locations are planned, Brahmawar wrote to the employees in an internal e-mail. However, it can be heard in company circles that a precise analysis of the business areas and a focus on lucrative areas are already being demanded now.
The two Silver Lake representatives on the Supervisory Board of Software AG are also likely to have discussed the recent job cuts. Around 200 of the 5,000 employees have to leave to reduce running costs – and the company is increasing its recently disappointing margin.
It is now up to the shareholders to decide on the offer. The management of Software AG will promote the deal at an investor conference on Monday.
More: Getting out of the value trap: How Silver Lake wants to finally put Software AG on a growth course