A New York private equity firm’s $2 billion bid to take Aliso Viejo-based Quest Software Inc. private is unlikely to be the only offer, according to company watchers.
The price offered earlier this month by Insight Venture Partners—about $23 a share, or a 19% premium at the time of the bid—is considered low by Wall Street. Meanwhile, a slew of big technology names could enter the fray as they seek to diversify their product lineups, a turn that could push Insight Venture to raise its offer.
The roster of companies said to be interested includes Dell Inc. in Round Rock, Texas, Redmond, Wash.-based Microsoft Corp. and IBM Corp. in New York. Some longer shots include Houston-based BMC Software Inc. and to a lesser extent Palo Alto-based Hewlett-Packard Co. and CA Technologies Inc., a Long Island, N.Y.-based IT management software maker.
Shares
Word of the deal with Insight Venture came March 9 and immediately sent Quest shares up 24% to nearly $24, touching off speculation of a higher bid.
Shares held about steady last week, and remain about 10% off their 52-week high of $26.90 last March.
Some analysts have put Quest’s value in the range of $26 to $28 a share, suggesting a value of $2.17 billion to $2.33 billion.
“We expect additional financial and strategic buyers to evaluate Quest, potentially raising the offer,” John DiFucci, an analyst at New York-based J.P. Morgan Securities LLC, wrote in a note to investors last week.
Representatives of Quest and Insight Venture Partners have declined comment since announcing their deal.
Quest makes software that manages and improves on other business products from Microsoft, IBM and Redwood Shores-based Oracle Corp., another potential suitor. The company is one of Orange County’s biggest software makers with $857 million in 2011 sales; it has 3,000 workers overall, about 600 here.
Quest’s board unanimously approved the deal with Insight Venture but also formed a special committee of three directors to consider other bids as part of a 60-day “go-shop” provision in the terms.
The deal calls for Quest to pay a $4.2 million breakup fee to Insight Venture if the deal isn’t completed by May 7 or $6.3 million if it’s called off at a later date.
Both are relatively low penalties. Irvine-based drive maker Western Digital Corp. faced a $250 million termination fee if it didn’t finalize its $4.8 billion buy of Hitachi Global Storage Systems Inc. in San Jose earlier this month.
Dell has been the company most linked to Quest.
It has been aggressive in diversifying beyond its core PC business, where sales have softened. It started a software division in February to move into storage and software services, a shift that seems to put Quest on its target list.
Conjecture
A Quest buy has been a subject of conjecture for several weeks. The potential was noted in late February by Peter Misek, an analyst for New York-based Jefferies & Co. Misek last week said he still believes Dell is interested in Quest. The analyst also has Hopkinton, Massachusetts-based IT service provider EMC Corp. in the mix.
Dell had $18.2 billion in cash and investments at the end of the December quarter and has been spending freely on its newly formed software division.
Last week it announced a deal to buy San Jose-based SonicWall Inc., a security and data protection software maker, for about $1.2 billion. That came on the heels of its February buy of AppAssure Software Inc., a Reston, Va.-based company that specializes in backup and recovery software for servers, datacenters and the cloud. Terms of that deal were not disclosed.
The company bought San Jose-based networking equipment maker Force 10 Networks Inc. last August on undisclosed terms, and picked up storage maker Compellent Technologies Inc. in Minnesota a year ago for roughly $856 million.
Potential Obstacle
Potential bidders for Quest could see an obstacle in Chief Executive Vinny Smith’s 34% stake in the company. He would remain as chief executive and retain his stake under terms of the deal with Insight Venture.
The big stake and top executive role for Smith could be a deal breaker for other bidders, said Brian Freed, an equity research analyst at Memphis-based Wunderlich Securities Inc.
“In a strategic acquisition, he would be unlikely to hold those positions,” Freed said.
It’s not known if Smith would be willing to relinquish those ties under a different deal.
He returned to the chief executive’s post last month to fill a vacancy left by Doug Garn, who shifted to the role of vice chairman, citing health considerations.
Smith has guided Quest to a position of market leader in database development and optimization. His earlier stint as chief executive ran from 1997 to 2008, and he’s credited with developing simplified applications for cloud computing and virtualization.
Quest now counts more than 2 million users and is a major presence in Microsoft’s infrastructure management market.
Smith’s first interest in Quest came via a 1995 investment by his investment firm that led to a seat on Quest’s board. He gradually became more involved, eventually taking the chief executive’s job.
