KUHN CAPITAL Monday, October 23, 2017
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Sunset for SunGard?

April 2

One of the great engines of IT M&A has been bought. SunGard Data Systems (Nasdaq SDS) accepted a $11.3 bilion offer from a consortium of large buyout firms led by Silver Lake Partners.

In reaction to early rumors of the pending deal , on March 21 SunGard shares popped nearly 25% from about $25 to about $32, boosting marketcap to $9.1B.

SunGard has effectively purchased or grown over 100 business units while growing smartly and profitability. Some of these were in the energy IT business, a market close to our heart. Examples: Caminus, a utility transaction management solutions provider, and public/utility sector applications vendor HTE.

SunGard is attractive not only for its strong management, but for the business itself: core specialized processing and storage facilities primarily for one of the world’s most profitable industries, financial services.

The result is steady revenue gains (about 20% per year for the period 2001 – 2003) and its own healthy after-tax profitability, 17% of sales in the most recent reported quarter

Despite all this, SunGard hasn’t garnered the street respect it deserves. Since 2003, its stock has lagged the appreciation enjoyed by both the Nasdaq and Dow Jones indexes. Even at the company's current $10 billion marketcap, it still only sports a trailing P/E of 22.5x and a price/sales multiple of 2.75x.

So given SunGard’s vigor, we agree that the company looks like a good buy. We just hope that the transaction doesn’t load the company with lots of debt, the usual private equity structure, thereby depriving the market of SunGard’s frequent and well-executed M&A transactions. See bankrupted KB Toys after new owner Bain Capital larded it with debt then doled out the proceeds to itself and other investors as dividends.

Bain is a member of the private equity consortium buying SunGard, which currently carries only about $500 million in long-term debt.


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