Software AG: Silver Lake and Bain square up in private equity stand-off

Software AG boasts one of the dullest corporate names in a tech sector never noted for the mercurial brilliance of its wordplay. But the dispute over the sale of the German enterprise software group is a good deal more compelling. The largest independent shareholder is kicking up a stink over the board’s unwillingness to engage with a higher bidder.

US buyout group Silver Lake has offered €2.6bn. UK fund manager Schroders, which holds 8 per cent of Software’s shares thinks this is too low. Bain has after all made a non-binding approach worth up to €2.9bn, via its portfolio company Rocket Software.

Schroders is muttering darkly about conflicts of interest. Reflecting a longstanding relationship, Software AG chair Christian Lucas is a Silver Lake director. He was recused from involvement in the committee deliberating on the rival offers, however.

Software AG’s board says Silver Lake’s bid is more likely to succeed. While both offers are for cash, Silver Lake has done its due diligence and is likely to have the necessary funding in place.

But Bain, as another large US buyout group, should easily be able to jump through all the same hoops.

The shares trade above Silver Lake’s offer, suggesting the market expects a firm offer from Bain. If it secured a sizeable majority, it might be able to merge the business with Rocket. Nonetheless it would still need to negotiate Germany’s complicated stakeholder protection rules.

Silver Lake controls 35 per cent of the shares. These include a stake acquired in the market plus shares from a deal struck with the largest holder, the Software AG foundation, controlled by Software AG’s founder Peter Schnell.

The magnitude of Silver Lake’s holding means a competing tender offer from Bain, which has a 10 per cent stake, could result in a stalemate. Neither would achieve the 90 per cent needed to squeeze out the other. Under German law, both sides could dig in. Let the game of chicken commence.