Santa Ana’s MSC.Software Corp., one of the oldest software makers in the county, is being snatched up by private equity investors after nearly 10 years of troubles.
Too many distractions brought on by several government probes, acquisitions that didn’t pay off and failed turnaround attempts spelled the end for an independent MSC, which once ranked among Orange County’s biggest software makers.
“The company has had a very troubled history, going way back,” said Mark Schappel, analyst at Benchmark Co. in New York. “They have had a lot of disruptions over the years and that took away from what they should have been doing. The product development side started lagging.”
Palo Alto-based private equity firm Symphony Technology Group LLC is paying about $360 million in cash to buy the company. The deal is set to close by the end of the third quarter.
Activist investor Elliott Management Corp., a unit of New York hedge fund Elliott Associates LP, played a role in the deal.
Elliott, which is set to provide some debt and private equity financing to help fund the deal, has a roughly 13% stake in MSC and is its biggest shareholder.
It had been agitating for change at MSC for the better part of a year.
A source familiar with the deal said MSC was an attractive private equity buyout because of its steady stream of ongoing revenue from licenses and service on its software.
“MSC has a very consistent, very rich maintenance stream of revenues that has been going on a long time but probably has not been managed well,” he said. The buyers probably “thought it was maybe not run ideally and that they could do some things better.”
Spotty Results
MSC has seen spotty results in recent years and has spent long stretches mired in red ink. Sales have been on a continuous slide.
In 2008, the company posted $247 million in sales, down 12% from a year earlier.
Before the deal was announced, MSC’s shares had been trading sideways since the start of the year on a recent market value of around $340 million.
Two shareholder lawsuits have been made public since the buyout offer was announced. Both are class-action suits that argue Symphony’s price is too low.
The buyout will mark the end of a decade of tough times for MSC, which makes simulation software used for testing parts of airplanes and autos before expensive prototypes are constructed.
In 1999, the Federal Trade Commission slapped MSC with an antitrust lawsuit after it had bought several privately held competitors.
The commission looked into MSC’s buy of Torrance’s Universal Analytics Inc. and Costa Mesa’s Computerized Structural Analysis & Research Corp.
The buys gave MSC a lock on the market for Nastran, a type of design-testing software.
MSC’s profits shrank as it poured millions into legal fees to fight the suit.
In 2002 MSC settled without admitting wrongdoing.
In 2005, the Security and Exchange Commission launched a probe into MSC’s books.
Regulators looked at MSC’s delay and restatement of financial results dating back to 2001 because of a previous internal investigation that revealed some big problems.
The ordeal took its toll on the company. MSC lost its listing on the New York Stock Exchange, saw executives leave, switched its accounting firm and fended off a takeover attempt by San Francisco hedge fund ValueAct Partners LP.
ValueAct offered $275 million to take the company private after acquiring a 10% stake. The hedge fund later agreed to back off its buyout bid until MSC got its financial statements in order.
After MSC’s filings got up to date it moved from the low-profile Pink Sheets to Nasdaq.
Former chief executive and chairman Bill Weyand, who took over in 2005 to get MSC’s house in order, said at the time that dealing with the accounting problem was “a Herculean effort and a light drain of market focus.”
Weyand was brought in after the accounting dustup to replace longtime leader Frank Perna.
Other executive shake-ups followed.
Earlier this year, the company named board member Ashfaq Munshi temporary chief executive after Weyand and former chief operating officer Glenn Weinkoop stepped down.
In the past few years, MSC has lost market share to more agile competitors.
Biggest among them is Canonsburg, Penn.-based Ansys Inc., which had a recent market value of nearly $3 billion.
The two companies have comparable software, but Ansys has poured a lot more development dollars into its product lineup.
“What Ansys has done very well is they made their user interface better and their output easier to read, which made the software very accessible for a more average engineer,” said Barbara Coffey, digital media software analyst at Kaufman Bros. LP in New York. “I don’t know that MSC put in the heavy lifting to get that done, so that’s how Ansys ate their lunch.”
Critical Mistake
MSC made a critical mistake in directing a lot of research and development money to develop a brand new software suite for larger corporations, according to one source familiar with the deal.
“MSC tried to focus their limited research dollars on an unsuccessful strategy,” he said. “They decided to build a game-changing enterprise platform, and it failed. It’s not at a place where it really can be sold.”
The company had trouble selling large corporations on the idea that every single worker needed a copy of the software, instead of just a select group of engineers.
“The site-wide license was a hard sell,” analyst Coffey said. “That’s where some of the disconnect came and the enterprise product didn’t gain any steam. It was a little bit too specialized for enterprise-wide adoption.”
It’s still unclear what’s set to happen to MSC under Symphony’s thumb. Both MSC and Symphony declined to comment for this story, pending the deal’s closure.
The most likely option, according to analyst Schappel, will bring more changes to a battered MSC.
More cuts likely are ahead as Symphony may look to streamline costs and bring in a new set of managers, he said.
