Software AG stake built by Bain to challenge Silver Lake

A large stake has been built in Software AG by Bain Capital, raising the possibility of a takeover battle occurring for this German company, people with knowledge of the matter said. 

It has been reported that Bain Capital is in talks with Darmstadt-based Software AG to discuss a potential merger with Rocket Software, which is a Bain portfolio company, the people said, declining to be named because the information is private. 

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Rocket Software and Software AG both offer technology solutions for large companies, a segment of the market that has remained relatively robust despite a general downturn in the overall technology industry. 

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There was an agreement last week between Silver Lake Management and Software AG to acquire the company for a cash offer of 30 euros per share, valuing the company at approximately €2.2 billion ($2.4 billion). Recently, the company's shares have been trading above the offer price, as investors have placed their bets on a potential bump or counteroffer that might be made. 

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There is a good chance that a counterbidder would need to offer more than Silver Lake in order to win over Software AG's stakeholders and have a better proposition as a strategic fit for the company. Taking on Silver Lake could prove to be a more difficult challenge after the company announced on Friday that it was taking steps to enhance its lead in a potential takeover situation.

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In the midst of its deliberations, Bain is at an early stage of the process and may not end up making a formal offer, according to the people. The representatives of Bain and Software AG declined to comment on the matter.

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As part of its investment in Rocket Software in 2018, Bain agreed to purchase a majority stake in the company. This company, based in the Boston area, sells hybrid cloud solutions, computing infrastructure software, as well as other tools and services related to large enterprises. The Rocket Software company announced last month that it had acquired Key Resources Inc. in order to expand the company's security offerings for mainframes.  

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There is a very high hurdle for any other suitor to overcome, as Silver Lake has an agreement to buy 25.1% of Software AG Foundation, as well as backing from management for its offer, which is at more than a 50% premium to the last close before it was announced. It was also announced on Friday that Silver Lake had submitted a tender offer to purchase the stake on behalf of the foundation, and the tender offer doesn't have to be successful for Silver Lake to acquire it. 

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Furthermore, Silver Lake has also announced that it has bought an additional 5% stake in the company, meaning it has now secured a 30% share of the business. 

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There are binding debt financing commitments that have been negotiated between the private equity firm and Software AG, and the private equity firm intends to delist the company as soon as is practically possible, according to Friday's statement. Moreover, the company said it wouldn't seek a stipulation referred to as a dominance agreement, thus reducing the chances that hedge funds could hold out and try to force a higher bid.