Elliott’s Analysis: Difficult proposition for BMC? Tough times ahead?

Elliott’s Analysis: Difficult proposition for BMC? Tough times ahead??


Recently Elliott Management, a $20 billion private investment firm that holds 5.5 percent of BMC Software common stock nominated a slate of five experienced executives for election to the BMC software board of directors at the company's annual meeting.

Elliot Management is one of the oldest hedge funds, and has a proven track record of successfully campaigning and selling high-tech companies. They have previously acquired stakes in software companies such as Novell and Blue Coat Software before they were acquired.

 From Elliott’s analysis it is clear that BMC’s future will be increasingly difficult if BMC remains a standalone, public company. Recent years have been challenging for BMC as it has suffered from sluggish growth, substantial execution challenges and underperformance on its business plan, and new competitive pressures. BMC’s future looks far more challenging than the past if BMC remains a standalone company, and that the window to preserve and maximize BMC's inherent value is rapidly closing.

 

Some of the key takeaways from Elliott’s Analysis of BMC are:

 

  • Stock Price Underperformance: BMC's stock has materially underperformed peers and indices over the past three years.
  • Lack of Scale: Smallest of the “Big Four”, BMC has been struggling to meet the customers’ demand for greater services, bundled solutions, and greater breadth of IT offerings.
  • Execution Challenges: BMC has been facing recent troubles with sales leadership with head of sales changing four times since 2010. As a result, some of the key issues have been serious execution problems, attrition and stress within the sales force.
  • Late to SaaS: Late on the cloud and SaaS train. First SaaS product launched just two years ago in an arena that is hyper-competitive. BMC faces tough challenges as it might not be possible for it to buy the growth it may desire or provide valuations from companies (Service-Now, Splunk etc) that once complemented BMC.
  • Competitive Landscape: Strategic competitors are under pressure to incorporate management into their own stacks. New competitors that did not exist a few years ago are making significant inroads into the "Big Four's" domain. BMC is also poorly equipped to meet the cloud computing demands, stiff competition coming from new players as well as former partners.
  • Challenged Performance in Enterprise Business: ESM license bookings excluding Numara actually declined more than 9 percent year over year in the quarter, and declined more than 12 percent for the fiscal year 2012. The guidance for 2013 also indicated continued challenged growth.
  • Ineffective Merger & Acquisition: BMC has been squandering billions of dollars of stockholder capital on an ineffective M&A strategy.
  • Professional Services Struggles:  BMC has historically struggled to generate positive gross margins in its professional services business.

 

With revenues of just $2.2 billion versus IBM's $107 billion, HP's $125 billion or even CA's $4.8 billion, BMC is challenged to compete with vastly larger solutions providers who can offer a fuller suite of products along with greater marketing heft and overall value to the customer.

 

Elliott believes the Board should immediately engage in a serious, concerted effort to pursue a sale of the Company

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