Is SunGard a good LBO candidate? Why? Why not?
We believe SunGard is a strong LBO candidate for the following reasons:
- Formed in 1983, SunGard is a well-established and industry leading company, which operates in the maturing information technology sector. There are relatively few risks to the company's business model and market position
- SunGard has a low debt-to-equity ratio with only $519 mn of long-term debt and over $3 bn of total equity in 2004
- The company is run by a strong and experienced management team. The CEO, Executive Vice President, and CFO all have approximately 15 to 20 year tenures with SunGard.
- SunGard has consistently grown revenue and net income in the past 5 years, illustrating the company's ability to capture market share in the industry
- SunGard has low working capital requirement, with no inventory, and minimal year-to-year changes in working capital
- The company has strong cash flows from operations, which has more than doubled in the past 5 years and has enabled the company to repay large portions of its debt
- There are low future investing and capital expenditure requirements, assuming the company stops making cash acquisitions
- There appears to be feasible exit options such as an IPO, given the high demand from investors which is reflected in the company's rising stock price
- There is the possibility of selling non-core assets to consolidate operations and raise cash, exemplified by the contemplated sale of the company's availability services business
Qualitatively, is the deal a good investment for the buyout investors?
Qualitatively, SunGard appears to be a good (but not great) investment for the private equity firms for the following reasons:
- Ability to leverage company; investment financed with approximately 30% equity
- Ample cash flows to...