In today’s letter to customers, MSC management announced that the Board had approved a merger with an affiliate of Symphony Technology Group. But the company provided no information as to why this might be a good deal for stockholders, other than stating that “It is Symphony’s mission to partner in helping to build great companies and in enabling growth through innovation.” Isn’t that what MSC management is paid to do? Does Symphony have some knowledge about simulation software? Does Symphony have some knowledge about the engineering analysis marketplace? What are the specifics of how Symphony will improve the company operations? In fact, MSC goes on to say that “We plan no changes to our current product direction or deliverables.” Weird, eh? Further, what does “This new ownership structure will streamline certain business processes that historically constrained MSC.” How is that for obfuscation? Why cannot MSC change their own business practices? After all, the old management left only a few months ago. What a perfect opportunity to change anything amiss.
After looking at some of the financials, we came to the conclusion that this appears to be a great deal for Symphony, and a crappy deal for the stockholders since that will have no way to participate in any upside potential for MSC Software.
While I do not claim to be a sophisticated financial analyst, here are some glaring items about the planned acquisition:
• With 45.2 million shares outstanding, the offer of $7.63 per share yields a net price of $344 million, only 1.35 times gross revenue, an extremely low price for a high tech company with a large recurring revenue.
• At year end 2008, the company had net revenue of $206 million, much of this recurring revenue. Recurring revenue requires less sales and admin overhead than new revenue.
• Yet their ratio of Selling and G&A Expense to R&D was almost 3:1. Compare this to PTC’s 2 to 1, Autodesk’s 2 to 1, Ansys 1.9 to 1 and Dassault Systemes 1.5 to 1. Taking these bloated expenses down could immediately result in an extra $50 million direct to the bottom line!
• On top of this, again at year end 2008, MSC’s current assets exceeded current liabilities by just over $100 million, with virtually no long term debt. This cash is immediately available.
• In spite of spending more than $50 million per year on research and development, MSC has a reputation for being a non-innovator in the industry.
With the cash and improved expenses, in two or three years, Symphony could have all of their investment returned! This appears to be a massive bargain for them. Clearly the company needs to be reworked, but why not manage it instead of selling it? And why give it away?
Disclaimer: None needed – Ray has no financial interest in MSC Software.