Talk is cheap, but BMC isn’t

Contact: Brenon Daly

All the talk around an acquisition of BMC may be just that – talk. We have a hard time believing some of the rumored buyers for the IT management vendor. That skepticism was shared by a few bankers who we spoke with about the rumor. In fact, they reminded us that the most recent M&A buzz around BMC had the company as a buyer, not a seller. Several sources have indicated that BMC was an early bidder for security provider ArcSight, but dropped out quickly when the price got a bit rich.

Nonetheless, M&A speculation pushed BMC shares Thursday to their highest level in a decade. Currently, the company garners a market cap of $7.6bn. Fittingly for a 30-year-old firm, BMC sits on a pile of cash. It has some $1.4bn in its treasury, although a bit of debt lowers its net cash position to about $1.1bn. The company recently indicated that it would generate in the neighborhood of $700m in cash from operations in the current fiscal year, which ends in March. Sales for the fiscal year are expected to come in at $2bn.

With an enterprise value of roughly $6.2bn, BMC currently trades at more than 3 times projected sales and almost 9x projected cash flow. Even without a take-out premium, those are fairly rich multiples for a company that grows just 2% per year. A premium could take BMC’s equity value to around $10bn.

Obviously, there are only a few companies that could write that a check that big and if we were to short-list them we would probably put Oracle and Cisco Systems on there – but for different reasons. The $1bn of maintenance revenue that flows steadily to BMC each year would undoubtedly catch Oracle’s eye. But buying $1bn of annual maintenance revenue for, say, $8bn (on a net cost basis) doesn’t look like the kind of bargain Oracle typically strikes.

And while Cisco has partnered with BMC for the management within its Unified Computing System, it’s not clear to us that Cisco actually needs to own BMC to further its interest in outfitting datacenters. To our mind, Cisco should just put the money it would spend on BMC toward the company that it should really buy: EMC.