SunGard Data Systems

Private
Equity
End term project

Amit Sharma
Niraj Todi
Geet Jain
Sameer Goyal
Vibhuti Sharma
 SunGard Data Systems

SunGard Data Systems, Inc. provides integrated software and processing solutions and
information availability services in the United States. A buyout investor group led by Silver
Lake Partners will take SunGard in a leveraged buyout transaction. SunGard is the financial
software powerhouse known for trading services and creating backup data systems in the
event of a disaster. SunGard claims its software manages 70 percent of the transactions
made on the NASDAQ Stock Market, but its biggest business is creating backup data
systems in case main systems are damaged or disabled by a natural disaster, blackout or
terrorist attack.

SunGard operates through three segments: Investment Support Systems (ISS), Availability
Services (AS), and Higher Education and Public Sector Systems (HEPSS).

Earlier SunGard was planning to spin off the Company’s availability services business. But
at the same time, Silver Lake partners offered the board for an acquisition deal at an initial
price of $31.88 per share (which was 20% premium over the current traded price of the
company’s share). The deal was managed by SunGard financial advisor Credit Suisse First
Boston.

After few rounds of discussions and negotiations, SunGard offered a final share price of $36
per share. Silver Lake Partners agreed to pay at $36 for the acquisition, which makes the
deal at $11.9 Billion. Seven private equity firms were part of the Silver Lake Partners: Bain
Capital LLC, The Blackstone Group LP, Goldman Sachs Capital Partners, Kohlberg Kravis
Roberts & Co., Providence Equity Partners Inc. and Texas Pacific Group.
Financing of the deal:

The SunGard buyout was an $11.9 billion transaction financed with $8 billion of debt
($5billion of senior secured debt and $3 billion of subordinated debt), $0.3 billion of
existing cash, and $3.6 billion of equity. Seven private equity firms contributed $3.5 billion
while management contributed $0.1 billion of the equity

Equity contribution of the 7 Private Equity Firms:

Equity Investor Commitment

Silver Lake Partners, L.P. $540,000,000
Bain Capital Fund, L.P. $540,000,000
Blackstone Partners, L.P. $540,000,000
GS Capital Partners, L.P. $500,000,000
KKR Millennium Fund, L.P. $540,000,000
Providence Equity Partners V LP $300,000,000
TPG Partners IV, L.P. $540,000,000
Total $3,500,000,000

All seven firms had strong track records and reputations. KKR was one of the pioneers of
the leveraged buyout transaction and had engineered the LBO of RJR Nabisco, largest LBO
of all time. Bain Capital and Texas Pacific Group had reputations for turning around
underperforming companies. While Silver Lake Partners was relatively young, it
specialized in the less competitive area of technology buyouts and had a strong track
record. Silver Lake also had a history of investing in financial services companies, including
Ameritrade, Datek and Instinet. The Blackstone Group and Goldman Sachs were among the
most prominent merchant banks, combining investment banking and private equity
investing.
Valuation of the deal

The deal can be valued using either DCF method or using the peer evaluation method.

DCF Method

The projections of the SunGard are given below:

PROJECTIONS
  2005 2006 2007 2008 2009
3936.
Revenues 6 4225 4515.3 4771.7 5040.8
1144.
EBITDA 5 1268 1381.6 1461.3 1545.4
Depreciation + Amortization 367 387.6 387.4 384.6 376.2
EBIT 777.5 880.4 994.2 1076.7 1169.2
Increase in Net working
capital -14.4 -21.4 -20.6 -17.1 -26
Capital expenditures 314.5 295.7 269.1 282.5 296.3

Based on these projections , the free cash flow to the equity is calculated

  2005 2006 2007 2008 2009

EBIT (1-T) 544.25 616.28 695.94 753.69 818.44
Depreciation 367 387.6 387.4 384.6 376.2
CAPEX 314.5 295.7 269.1 282.5 296.3
Increase in Net working capital -14.4 -21.4 -20.6 -17.1 -26
Free cash flow to firm 611.15 729.58 834.84 872.89 924.34
1340.7 2175.5 3048.4
Cash balance 611.15 3972.8
3 7 6
Net debt* 500 7500 0 0 0
Interest Payment 28.3 529.3 529.3 529.3 529.3
8311.4 1646.2 2519.1
Free Cash Flow To Equity 1082.85 20046.14
3 7 6
*Refer to annexure for the debt schedule

The present value of the FCFE is $21,740.12 M

No of outstanding share are 385 M

Hence the value per share is $56.44

Based on the DCF Method, company is valued at a higher value compared to the offer by
Silver Partners. The Silver partners have offered price at a 36% discount. This discounted
price can be contributed to the risk associated with the business SunGard operates in.
Apart from the riskiness also the operating margins and the lifecycle stage of the company
also raises further questions. For example: in year 2004 SunGard had PAT of $454 million
on revenues of $3.56 billion, which shows it is operating at an operating margin of 12.7%.
Another reason for the undervaluation was it was operating in 2 businesses, one appealed
to one constituency, and one type of investor, and another appealed to another

P/E Multiple Method

Using the peer evaluation method, the following can be observed regarding the competition

Current P/E 12 Month Forward P/E

AS Competitors
Affiliated Computer 16.6 -
Computer Sciences Corp. 15.5 14
Electronic Data Systems Corp - 42.8
International Business Machines
Corp. 15.2 15.2
ISS & HEPSS Competitors
Automatic Data Processing Inc. 26.2 -
Bisys Group Inc. 22.6 20.3
DST Systems Inc. 18.1 17.7
Fiserv Inc. 19.4 18.9
SEI Investments Co. 20.4 18.9

SunGard 22 -

19.5555555
Mean 6 21.11429

For our calculation we will use the P/E Multiple to be 20

PAT 453.6
No of shares Outstanding 280
EPS 1.62
Industry Multiple 20
Price Per Share 32.4

Using this method it shows the price offered by Silver partners is offering a premium of $4.
This price per share calculated using this method shows that industry is trading at a
discounted P/E, which is reflected in the lower value of price per share.

Annexure

Debt Schedule

Amoun
Sources of funds t Interest Rate Interest Value
       
Bank Debt (7yr & 6 mnth) 5000 6.02 301
High Yield Debt (12 yr) 2500 8 200
Debt assumed 500    
Cash 310    
New equity assumed 3500    
Management rollover 109.8    

Debt Schedule
  2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Debt 500 8000 8000 8000 8000 8000 8000 8000 8000 3000
Interest 28.3 529.3 529.3 529. 529.3 529.3 529. 529.3 378.8 200
3 3
Change in 500 7500 0 0 0 0 0 0 0 -5000
debt