(Updates throughout; adds comments from Schwartz, potential
suitors on private equity and strategic end, fund Insight is
investing from and firm's prior connection with Quest.)
By Michael Wursthorn
Of DOW JONES LBO WIRE
In what would appear to be its biggest investment ever, Insight
Venture Partners entered into a $2 billion, take-private deal to
acquire information technology-services provider Quest Software
Inc. (QSFT), but the firm may have to beat off competition from
private equity and strategic investors alike thanks to an
attractive "go-shop" agreement.
New York-based Insight is offering Quest's shareholders $23 a
share, a 19% premium to the company's 4 p.m. Thursday trading price
of $19.40. To finance the transaction, Insight will invest $210
million of equity, making it the firm's largest single-deal
investment to date, while J.P. Morgan Chase & Co., RBC Capital
Markets and Barclays Capital will provide $1.195 billion of
debt.
Shares of the Aliso Viejo, Calif., company rose 24%, or $4.67,
to $24.07 in 4 p.m. trading Friday, exceeding Insight's offer by
more than a dollar.
Insight declined to comment beyond a statement. Quest didn't
return a call seeking comment.
With more than 100,000 customers, Quest provides software
associated with infrastructure hardware, such as databases,
servers, operating systems and virtual environments. Analysts that
cover the Quest said it has had to face increased competition from
companies that build enterprise systems it traditionally provided
software for, such as Oracle Corp. (ORCL), which has been building
its own tools to manage systems.
A note by Aaron Schwartz, a Jefferies & Co. analyst who
follows Quest, said Insight's offer was on the "fair-to-low side"
and added that it wasn't "competitive." He urged investors to hold
the stock.
What may make this deal a bit of a saga is its go-shop
agreement. Quest has a 60-day window to shop for better offers and
would have to pay $4.2 million to Insight if it decides to
terminate the agreement during the period.
According to Schwartz, Quest's termination fee is "very low."
Historically, he said the average termination fee is closer to 3%
of the entire deal, but he added that the he believes that
percentage has been increasing slightly.
Brian Freed, an analyst with Wunderlich Securities, said the
go-shop terms seem to be a legal necessity. "It gives [Quest] a
means to say they made their best effort to find value," said
Freed.
The deal with Insight would allow Quest Chairman and Chief
Executive Vinny Smith to retain his position and his 34% stake in
the business if the transaction closes.
Smith, 48 years old, rejoined the company Feb. 14, replacing
Douglas Gam, who stepped down "for personal health reasons,"
according to a statement. Smith had previously held the chief
executive mantle from 1997 to 2008.
His previous stint as chief executive of Quest had him working
with Insight, which was a venture backer of the company's. Right
before Quest made its debut on the Nasdaq Global Market in 1999,
Insight had owned a 7.5% stake in the business through the firm's
second fund, according to Securities and Exchange Commission
filings at the time.
According to Schwartz's note, Smith is a limited partner in
certain Insight funds. The chief executive recused himself from the
process, the statement said.
While the go-shop period may be a legal shield, it may also
serve as a catalyst for private equity firms and strategic players
to make an offer.
An investment banker that focuses on the technology sector said
rival private equity firms Thoma Bravo, Francisco Partners, Golden
Gate Capital and Warburg Pincus will likely take a look at Quest.
The banker added Oracle Corp. and Dell Inc. as potential suitors as
well.
Wunderlich's Freed said Thoma Bravo may be a likely investor to
submit an offer, as well as Vector Capital and Dell. Jefferies's
Schwartz listed Golden Gate, Thoma Bravo and Dell as possible
buyers, too.
Freed and Wunderlich don't own shares of Quest or do business
with the company. Schwartz doesn't own shares either, but Jefferies
disclosed that it "does and seeks to do business" with Quest.
Established in 1987, Quest has generated steadily rising revenue
since 2009, most recently reporting $857.4 million for 2011, up
from $767.1 million for 2010, attributing the increase to a jump in
sales of its migration products as customers migrate to Windows
Exchange Server 2010 and Microsoft Sharepoint 2010. Quest added
50%, or $44.8 million, of its total revenue increase from
acquisitions last year. However, net income narrowed to $52.1
million from $98.6 million.
Insight, founded in 1995, typically targets software and
Internet businesses. The firm participated in a $165 million club
investment in Drilling Info Inc., of which Insight provided the
majority of the funding, according to an earlier report by
VentureWire, a Dow Jones publication covering the technology
industry.
The firm is committing funds for the deal out of its seventh
fund, Insight Venture Partners VII LP, a $1.5 billion vehicle
raised last year, according to a filing with the SEC.
(Dow Jones LBO Wire covers buyout and growth equity deals, as
well as private-equity fund-raising and other news of interest to
the private equity community.)
-By Michael Wursthorn, Dow Jones LBO Wire;
michael.wursthorn@dowjones.com