Software AG (SOW.XE) is to take over German peer IDS Scheer AG (IDS.XE) in a cash-and-debt deal worth up to EUR477 million, that will give the company the scale to compete more effectively for major contracts in the growing market for business process management software.

The deal announced late Monday, the first big acquisition in Germany's business software sector this year, follows larger U.S. peer Oracle Corp's (ORCL) $7.4 billion swoop for Sun Microsystems Inc. (JAVA) in April.

Still, Software AG's offer of EUR15 per IDS Scheer share, for around 32.2 million outstanding shares, was on the high side at a 39% premium to Monday's closing price, said analysts at Landesbank Baden Wuerttemberg.

"The deal will create a world-class level software powerhouse," Software AG chief executive Karl-Heinz Streibich said in a conference call Tuesday.

One of Software AG's core strengths is in software to automate and optimize business processes. IDS Scheer's speciality is the analysis of businesses processes, which is an area with growth potential, said Streibich, adding that the combined company will have the critical mass to win big contracts in more countries.

Software AG, with a market capitalization of about EUR1.4 billion has 4,000 customers in 70 countries. IDS Scheer, capitalized at about EUR480 million, has 7,500 customers in 70 countries.

IDS Scheer shares soared Tuesday, trading 39% up to almost EUR15 while, in a reflection of the premium it paid, Software AG shares fell 4.1% to EUR48.17.

Software AG said IDS Scheer founder August-Willhelm Scheer and supervisory board Vice Chairman Alexander Pocsay, both major shareholders, had agreed to sell 47.68% of the outstanding IDS Scheer stock. The tender offer will start in August and the deal, which is subject to regulatory approval, could be completed in the third quarter.

Software AG's management didn't elaborate on the level of synergies it hopes to achieve nor on purchase price allocations, but said it will provide an updated full-year outlook with third quarter results Oct. 22.

Chief Financial Officer Arnd Zinnhardt told Dow Jones Newswires that Software AG aimes to hit a margin on earnings before interest, taxation, depreciation and amortization of around 25% in two to three years.

Bank of America-Merrill Lynch's analysts said the deal makes sense but noted that the majority of IDS Scheer's revenue is generated by its low-margin SAP integration business. SAP AG (SAP) provides business software but doesn't compete with Software AG in its core business.

In 2008, Software AG's earnings before interest, taxes, depreciation and amortization, or Ebitda, margin was 28.6% while IDS Scheer's Ebitda margin was just 8.8%, so the combined company's Ebitda margin would have been 21.5% in 2008.

Software AG said it will finance the deal, which including transaction costs has a total volume of EUR487 million, with EUR107 million in cash, EUR45 million from Software AG Stiftung, the company's majority shareholder with a 29.4% stake, and the remaining EUR335 million with bank financing.

Software AG aims to repay its debt by 2012 or 2013, Zinnhardt said. Its net debt was EUR31.5 million at its first quarter report.

There are no plans for a capital increase to finance the deal, the company said.

 
   Company Web site: www.softwareag.com

-By Archibald Preuschat and Philipp Grontzki, Dow Jones Newswires, +49 211 138 7218, archibald.preuschat@dowjones.com