UPDATE: Quest Software To Go Private In $2 Billion Deal

Business-software maker Quest Software Inc. (QSFT) agreed to be acquired by Insight Venture Partners for $2 billion, which includes a modest premium for a company still trying to improve its stature in a hot sector.

Quest, of Aliso Viejo, Calif., has faced mounting competition in its traditional specialty--software for managing databases--as vendors such as Oracle Corp. (ORCL) have introduced their own management tools. Quest Software has responded by trying to diversify its business by snapping up smaller rivals.

"Frankly, this is the optimal point for a [private-equity] firm to buy Quest because you've done all the ugly work," Wunderlich Securities analyst Brian Freed said. "What lies ahead of you now, if you execute on it correctly, is reaping the benefits."

Insight Venture Partners, a New York private-equity and venture-capital firm, agreed to pay $23 a share, a 19% premium to Quest's Thursday close and a level the stock last traded at in July.

Quest shares recently traded above the offer, up 24% at $23.95, indicating investors either are hoping for or anticipating a higher offer. The agreement includes a 60-day "go-shop" provision that allows Quest to solicit alternative proposals and calls for Quest to pay Insight a breakup fee of $4.2 million. After the "go-shop" period ends, the breakup fee rises to $6.3 million.

Other software companies have sold for much bigger multiples of late, especially those focused on cloud-based tools delivered over the Internet. SAP AG (SAP, SAP.XE), for example, agreed to buy human-resources application maker SuccessFactors Inc. for a 52% premium.

Quest's earnings have declined in recent quarters even as its revenue has risen, as costs tied to purchased technology and other assets also have increased.

The company plans to slow down on acquisitions, Chief Executive Vinny Smith said last month. He added that Quest will focus on integrating staff and intellectual property it picked up from companies such as BakBone Software Inc., the data-protection-applications maker Quest agreed to acquire for $55 million in 2010.

Smith and the existing senior management team will remain, and the company plans to maintain its headquarters in California. Smith agreed to roll over his 34% stake into the newly created private company.

Wunderlich's Freed said Dell Inc. (DELL), which is trying to boost its business-software operation, is a potential acquirer. Freed, though, said he expects Insight Ventures to be the ultimate acquirer, noting the suitor offered a structure that allows Smith the chance to profit from his large stake.

A Quest Software spokesman declined to comment beyond a press release about the deal. Quest's board voted unanimously in favor of the deal, which the company said followed a strategic review with outside advisors. Smith, who also serves as chairman, recused himself.

-By Matt Jarzemsky, Dow Jones Newswires; 212-416-2240; matthew.jarzemsky@dowjones.com

--Melodie Warner contributed to this article.

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