5 Questions for Bill Chisholm, Symphony Technology Group

Symphony Technology Group last night announced an agreement to acquire MSC.Software Corp., a publicly-traded provider of simulation software for designing and testing manufactured products. The leveraged buyout is valued at approximately $360 million ($7.63 per share), with hedge fund Elliott Management also participating on the equity. So we’ve got 5 Questions for STG managing director Bill Chisholm:

1. How did this deal come about?

We’re a mid-market software and tech services investor, so we try to keep pretty close tabs on companies that could be of interest to us, and keep in touch with their executives. It’s not like there are hundreds of attractive ones out there.

MSC is one we’ve tracked for a long time. This time around we were a bit more aggressive and direct, and the company was a bit more receptive than it’s been in the past.

2. Were you concerned that, even if MSC agreed to pricing, that you’d have a tough time lining up debt?

I wouldn’t say that the financing freeze has thawed in the mid-market, but there’s at least a bit more receptivity than there is at, say, in the mega-buyout market. People like Wells Fargo Foothill and CapitalSource haven’t gone away; they’re just more selective, their holds are slightly smaller and they’re less likely to underwrite club deals.

What I think happened here is that MSC had some characteristics that were particularly attractive. Software lending really took off in the early 2000’s when Foothill – who I really consider to be the pioneer – began lending against recurring revenue streams. Over 50% of MSC’s revenue is recurring in terms of maintenance. That, combined with strong gross margins, gives lenders comfort that there’s visibility into future cash-flow streams of this business in both good times and bad.

3. Why did you team up with Elliott Management on the equity? How will control be split between your two firms?

They’re the largest shareholder in the company right now [approx. 14%], and they’re primary objective was  for MSC to go private. We worked with them and they were willing to help us by staying in the company, both in the form of rolling over their equity as well as helping with some mezzanine debt.

I don’t want to get into percentages, but Symphony is in a majority control position. We’re a pretty hands-on, operations-oriented firm, so we usually want to make sure we have control in order to work with management and to have the commensurate upside potential.

4. You mentioned that Elliott wanted MSC to go private. Beyond the generic reasons, what can MSC do as a private company that it can’t do as a public one?

Well, first I am going to mention the generic stuff about overhead and not having to be a quarter-to-quarter sort of company.

But, more specifically, this sector is really driven by the need to innovate. We’re talking about highly-technical, mission-critical software for the aerospace and automotive industries, and it’s very competitive. You can’t do it overnight. It takes time, patience and the willingness to invest around innovation. Sometimes as a public company you’re not able to do that, to invest for the future…. We’ve put a significant pool of working capital aside for the company, and will do whatever it takes to support them.

5. MSC’s stock chart over the past year is a bit nauseating, with some major valleys. Given that you’ve tracked the company for a long time, how stable has your price target been?

I would say we’ve been relatively consistent. The fact that we ended up fairly near the current trading price probably helps argue for the market being the best indicator.