 Elliott Management‘s Perspectives on BMC
Exhibit 1
May 31, 2012 |
 [
1 ]
Additional Information
Elliott Associates, L.P. and Elliott International, L.P.
(“Elliott”) intend to make a filing with the Securities and Exchange Commission of a definitive
proxy statement and an accompanying proxy card to be used to solicit
proxies in connection with the 2012 Annual Meeting of Stockholders
(including any adjournments or postponements thereof or any special meeting
that may be called in lieu thereof) (the “2012 Annual Meeting”) of
BMC Software, Inc. (the “Company”). Information relating to the
participants in such proxy solicitation has been included in a preliminary proxy
statement filed on May 25, 2012, by Elliott with the Securities and
Exchange Commission. Stockholders are advised to read the definitive proxy
statement and other documents related to the solicitation of stockholders
of the Company for use at the 2012 Annual Meeting when they become
available because they will contain important information, including
additional information relating to the participants in such proxy solicitation.
When completed and available, Elliott's definitive proxy statement and a
form of proxy will be mailed to stockholders of the Company. These
materials and other materials filed by Elliott in connection with the
solicitation of proxies will be available at no charge at the Securities and
Exchange Commission's website at www.sec.gov. The definitive proxy
statement (when available) and other relevant documents filed by Elliott with
the Securities and Exchange Commission will also be available, without
charge, by directing a request by mail or telephone to MacKenzie Partners,
Inc., 105 Madison Avenue, New York, New York 10016 (call collect:
212-929-5500; call toll free: 800-322-2885).
Cautionary Statement Regarding Forward-Looking Statements This proxy
statement contains “forward-looking statements.” Specific forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts and include, without limitation,
words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,”
“estimates,” “projects,” “targets,”
“forecasts,” “seeks,” “could” or the negative of such terms or other variations on such terms or comparable
terminology. Similarly, statements that describe our objectives, plans or
goals are forward-looking. Our forward-looking statements are based on our
current intent, belief, expectations, estimates and projections regarding
the Company and projections regarding the industry in which it operates.
These statements are not guarantees of future performance and involve
risks, uncertainties, assumptions and other factors that are difficult to predict
and that could cause actual results to differ materially. Accordingly, you
should not rely upon forward-looking statements as a prediction of actual
results and actual results may vary materially from what is expressed in
or indicated by the forward-looking statements. This cautionary statement is
applicable to all forward-looking statements contained in this proxy
statement and the material accompanying this proxy statement.
Industry and Market Data The
Gartner Report(s) described herein, (the “Gartner Report(s)”) represent(s) data, research opinion or viewpoints published, as part of a syndicated
subscription service, by Gartner, Inc. (“Gartner”), and are not
representations of fact. Each Gartner Report speaks as of its original publication date
(and not as of the date of this Filing) and the opinions expressed in the
Gartner Report(s) are subject to change without notice. |
 I. Executive Summary
|
 [
3 ]
Why Are We Here?
Based on our extensive analysis of BMC, we believe the following:
By any objective measure or any relevant time period, against any
pertinent benchmark, BMC common stock has significantly
under-performed BMC’s execution over the past several
years has been poor on numerous fronts, and its growth has been non-existent
Despite BMC’s clear product strength, the competitive landscape in
BMC’s enterprise distributed business is becoming
increasingly challenging, with threats from larger scale players, bundled
product providers, as well as newer SaaS and cloud vendors
Instead of fresh insights or innovative plans, BMC has instead responded
with the same “solutions” that have failed so
often in the past –
BMC needs new ideas and it needs them NOW
The Board of Directors would significantly benefit from Elliott’s
Nominees who bring senior-level experience from leading
software and technology companies, a new approach and an openness
to thoughtful evaluation of the business Conclusion:
Elliott
believes
that
BMC
is
not
a
good
–
but
a
GREAT
–
company
that
can
return
significant
and
long-overdue value to its stockholders if it chooses to embrace new
Directors with new ideas The time is now
to bring a fresh perspective to the BMC Board of Directors
Elliott
Management
and
its
collective
funds
–
holders
of
6.5%
of
BMC’s
common
stock
–
welcome
the
opportunity to present its viewpoints on BMC and its plan to deliver
significant value to stockholders |
 [
4 ]
About Elliott
More than $20 billion of assets under management
Extensive experience in the technology sector, including successful
investments in Novell, MSC Software, Epicor Software, Blue Coat
Systems, Metrologic, and others Long-term
view
of
investments
and
a
focus
on
creating
value
for
all
stockholders
–
recent
examples
include
URL
Pharmaceuticals, Adelphia Communications, WorldCom Communications, and
Horizon Offshore Elliott, founded in 1977, is one of the oldest
private investment firms of its kind under continuous management. The
firm’s investors include pension funds, private endowments, charitable foundations, family offices, and
employees of the firm
Elliott has performed exhaustive research on BMC over the last six months,
a process which included enlisting external consultants to advise
us, as well as speaking with customers, opinion leaders, engineers, competitors, former employees,
senior executives in the software industry, investment bankers, private
equity firms and other investors Elliott has surveyed in excess of
five hundred users of IT management software, following up with customers who have
transitioned to or away from BMC
Our conclusion from this analysis is that BMC's assets are valuable and
important, but that its future will be increasingly difficult if
BMC remains with its existing strategy New Board perspectives are
needed to fully realize BMC’s value potential ELLIOTT’S
RESEARCH AND PERSPECTIVES ON BMC |
 [
5 ]
BMC’s Material Stock Price Underperformance
By any objective measure, over any relevant time period and against any
pertinent benchmark, BMC's shares have significantly
under-performed Source:
Capital IQ
1.
03/18/12
represents
date
on
which
Elliott’s
purchase
of
over
9mm
shares
of
BMC
began,
causing
stock
prices
subsequent
to
this
date
to
not
be
applicable
due
to
this
extraordinary
support
2.
10-K Peers include IBM, HPQ, and CA; listed as BMC’s closet
competitors in the Company’s annual 10-K report 3.
Proxy
Peers
include
SYMC,
CPWR,
ADBE,
CA,
ORCL,
MSFT,
SAP,
CTXS;
listed
in
BMC’s
annual
proxy
statement
for
LTIP
determination
purposes
4.
Includes Nasdaq, S&P 500, and Dow Jones Industrial indices
Ending
March
18,
2012
1
YTD
3-Year
2-Year
1-Year
March
18,
2012
1
1. VERSUS CLOSEST COMPETITOR
CA
64.0%
16.1%
19.1%
34.1%
BMC
21.9%
(1.9%)
(19.3%)
16.3%
(Under) / Over Performance
(42.2%)
(18.0%)
(38.4%)
(17.8%)
2.
VERSUS
10-K
PEERS
2
10-K Peers
56.8%
8.0%
3.5%
12.2%
BMC
21.9%
(1.9%)
(19.3%)
16.3%
(Under) / Over Performance
(35.0%)
(9.9%)
(22.8%)
4.1%
3.
VERSUS
PROXY
PEERS
3
Proxy Peers
86.9%
21.5%
10.8%
22.1%
BMC
21.9%
(1.9%)
(19.3%)
16.3%
(Under) / Over Performance
(65.0%)
(23.4%)
(30.1%)
(5.8%)
4. VERSUS BROADER SOFTWARE INDEX
S&P GSSI Software Index (iShares)
104.9%
33.8%
12.8%
19.3%
BMC
21.9%
(1.9%)
(19.3%)
16.3%
(Under) / Over Performance
(83.1%)
(35.7%)
(32.1%)
(3.0%)
5. VERSUS BROADER MARKET INDICES
Market –
Mean
4
87.9%
24.3%
12.3%
10.7%
Market –
Median
4
79.1%
23.2%
11.6%
10.0%
BMC
21.9%
(1.9%)
(19.3%)
16.3%
(Under) / Over Performance -
Mean
(66.1%)
(26.2%)
(31.7%)
5.6%
(Under) / Over Performance -
Median
(57.2%)
(25.1%)
(30.9%)
6.3% |
 BMC’s Material Stock Price Underperformance (cont’d)
Source:
Capital IQ
1.
As
of
03/18/12,
which
represents
date
on
which
Elliott’s
purchase
of
over
9mm
shares
of
BMC
began,
causing
stock
prices
subsequent
to
this
date
to
not
be
applicable
due
to
this
extraordinary
support
2.
Represents average of Nasdaq, S&P 500, and Dow Jones Industrial
indices 3.
Proxy
Peers
include
SYMC,
CPWR,
ADBE,
CA,
ORCL,
MSFT,
SAP,
CTXS;
listed
in
BMC’s
annual
proxy
statement
for
LTIP
determination
purposes
4.
10-K Peers include IBM, HPQ, and CA; listed as BMC’s closet
competitors in the Company’s annual 10-K report [
6 ]
Over any relevant time frame, BMC’s stock has consistently
underperformed the market and its peers |
 Oct 26, 2011
–
BMC beats Q2
revenue estimates but
again
lowers forecast
for ESM license
bookings growth from mid-teens
percentage growth to mid-single
digits percentage decline
[
7 ]
Destruction of Stockholder Value
Poor execution has caused stock price degradation over the past 12
months¹ Source:
Capital IQ, Company Filings
1.
LTM
as
of
03/18/12,
which
represents
date
on
which
Elliott’s
purchase
of
over
9mm
shares
of
BMC
began,
causing
stock
prices
subsequent
to
this
date
to
not
be
applicable
due
to
this
extraordinary support
2.
Represents mean of Nasdaq, S&P 500, and Dow Jones Industrial
indices Jul 27, 2011
–
BMC misses
Q1
revenue estimates by ~1%, and
lowers
forecast for ESM license
bookings growth from low 20s
to
mid-teen
percentages
Feb 1, 2012
–
BMC misses
Q3 revenue estimates by
~1.5% and lowers ESM
license bookings decline to
high single digits to low
double digits
Significant
Underperformance
Relative
to
Market
Indices
²
by
32% |
 [
8 ]
What is BMC Today?
SEGMENT
REVENUE BREAKDOWN
OVERALL STATISTICS
COMMENTARY
Enterprise
Service
Management
(“ESM”)
Growth below its potential
License bookings have woefully
underperformed over the past year
Room for margin improvement
Margins have been stuck at ~21% but
should be higher given $1bn+
revenue scale
Leader in IT management software
Despite execution failures, ESM
possesses a comprehensive portfolio
of market leading products used by
over 25,000 customers
Mainframe
Service
Management
(“MSM”)
Strong stable business
Good margins and cash flow capability
Benefited from “benign neglect”
and lack
of new competition
Over a third of the business is workload
automation, which is growing and taking
share
($ in millions)
% Operating Margin
n/a
21.0%
21.9%
21.0%
% Operating Margin
n/a
56.5%
57.5%
59.9%
Source:
Company Filings
1.
FY2002A ESM revenues include Other Software revenues. ESM and MSM
revenues exclude Other revenues of $7.9mm BMC is really comprised of
two businesses ESM
has
been
the
focus
for
the
past
ten
years,
though
growth
and
margins
have
been
weak
despite
strong
products
and
good
markets
MSM has continued to perform well, but it has become a smaller piece of
the business 61.8%
61.9%
59.8%
55.1%
FY2002A
FY2010A
FY2011A
FY2012A
% of Total Revenue
38.2%
38.1%
40.2%
44.9%
FY2002A
FY2010A
FY2011A
FY2012A
% of Total Revenue |
 II. Drivers of
BMC’s Underperformance |
 [
10 ]
What Went Wrong with BMC?
Management has failed to execute
Despite
a
much
smaller
revenue
base
relative
to
its
larger
competitors
and
substantial
investments
in
sales
and
marketing,
BMC
revenue
growth has been anemic
Sales execution has been poor and ESM license bookings have actually
declined despite significant sales and marketing investments trumpeted
by senior management
BMC
was
late
to
SaaS
and
is
now
playing
“catch
up”
against
emerging
and
established
competitors
in
this
high-growth
market
Poor stewardship of stockholder's capital
BMC has been squandering billions of dollars of stockholder capital on an
ineffective M&A strategy BMC
has
chosen
to
preserve
an
inefficient
balance
sheet
when
the
opportunity
to
return
capital
has
been
attractive
Failure to fully optimize operations
ESM generates operating margins of only 21% despite revenues of over
$1bn Adjusting for capitalized R&D and stock-based
compensation, BMC’s consolidated operating margin is lower than its closest peer
BMC has historically struggled to generate positive gross margins in its
professional services business Competitive landscape is changing
BMC
has
great
products
and
deep
customer
presence,
but
is
facing
an
increasingly
competitive
environment
Large
enterprise
customers
are
increasingly
demanding
bundled
solutions
and
BMC
lacks
the
scale
of
its
“Big
3”
Management
Software
competitors (IBM, HP, and CA)
More nimble companies with refreshed offerings such as ServiceNow,
SolarWinds, and Splunk are emerging as new threats in areas where
BMC used to win on the basis of best-in-class point tools (eg.
service desk) Strong need for Directors with relevant experience and
fresh ideas BMC's
Board
would
be
well
served
to
include
more
Directors
with
technology
backgrounds,
especially
in
today’s
rapidly
changing
marketplace
Elliott’s Nominees include former CEOs and senior executives who
bring perspectives from significant Software/Technology companies and
expertise with emerging business models (eg. Cloud)
Our
Nominees
are
highly
experienced
executives
willing
to
challenge
the
status
quo
at
BMC
and
explore
all
alternatives
to
create
stockholder
value
Conclusion:
Elliott believes that there is an opportunity for stockholders to realize
value SIGNIFICANTLY greater than BMC’s current stock price
through the addition of thoughtful and experienced technology executives who
will encourage a full strategic and operational review with the aim of
maximizing stockholder value 5
4
3
2
1 |
 [
11 ]
Management Has Failed to Execute
“So
over
the
course
of
Fiscal
2009,
we
significantly
strengthened
our
sales
force.
We
invested
in
the
most
complete
and
powerful sales training in our history. We brought in new
management and sales professionals to upgrade an already strong
and talented team”
–
Bob Beauchamp (2009 Annual Report)
“The organizational separation of our MSM business from our ESM
business two years ago continues to pay
dividends.
Our offerings today are superior to the competition’s and our people
are energized and focused” –
Bob Beauchamp (2008 Annual Report)
“The separation of our two business units—ESM and MSM—at the beginning of 2007 provides sharper focus and
greater accountability.
And the operating and financial discipline we’ve instilled across
our company makes us a faster, more agile, and more productive
enterprise” –
Bob Beauchamp (2007 Annual Report)
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
“We
substantially
upgraded
our
Enterprise
Service
Management
(ESM)
sales
force
and
expect
that
we’ll
increase
the
average number of productive sales reps in fiscal 2011 by 20% over last
year’s levels” –
Bob Beauchamp (2010 Annual Report)
“We also strengthened our ESM sales team, achieving a 20% increase in the average productive sales headcount compared
to the prior year, while significantly slowing attrition”
–
Bob Beauchamp (2011 Annual Report)
“We made further progress to improve sales execution, including numerous
steps taken to address sales attrition,
and
our
tenured
and
overall
ESM
sales
force
capacity,
excluding
Numara,
is
up,
finishing
the
year
with
20%
more
total
sales capacity than at the beginning of fiscal 2012…. The progress
here is evidence of our efforts to address our well-documented
fiscal 2012 challenges to improve sales force capacity and productivity,
and it puts us in a much-improved position as we enter fiscal
2013” –
Bob Beauchamp (Q4 and FY2012 Earnings Call on May 9, 2012)
First, it was
“separate ESM
and MSM”
Then, four
years of
management
“focus”
on
strengthening
ESM sales
force, which
clearly
remains a
major issue
1
BMC
management
repeats
the
same
old
story
year
after
year,
with
no
demonstrable
progress,
whether
it’s
extolling the benefits of separating ESM and MSM, or repeating the benefits
of investing in its sales force |
 Management Has Failed to Execute
MANAGEMENT’S REPRESENTATIONS ON SALES AND MARKETING INVESTMENTS
LTM SALES & MARKETING AS % REVENUE
“These [Fiscal Year 2011] strong results underscore the success of
our strategy over the last several years to make disciplined investments that
enhance our market leadership and enable us to
accelerate top line growth. As part of this strategy, we strengthened our sales force,
increased internal R&D efforts related to cloud and other major
technology trends, selectively acquired complementary technologies in rapidly
growing market segments and bolstered our strategic partnerships. These initiatives are clearly paying off and we expect to reap
additional
benefits
in
2012
and
beyond”
–
Bob Beauchamp (Q4 2011 Earnings Conference Call)
“It [Fiscal Year 2011] was a year in which we transitioned from
being a strong, moderate growth company to one characterized by sustained,
accelerating growth
[BMC’s emphasis] led by a solid Enterprise Service Management (ESM)
engine capable of delivering ongoing double- digit
growth” –
Bob Beauchamp (2011 Annual Report)
“It [Fiscal Year 2011] was a year in which we demonstrated our
ability to achieve these results while at the same time making the
investments
in
internal
development,
sales
and
services
necessary
to
increase
our
competitive
advantage
[BMC’s
emphasis]”
–
Bob Beauchamp (2011 Annual Report)
LTM REVENUE GROWTH
Y-o-Y Growth
3.7%
Y-o-Y Growth
6.7%
Enterprise
Solutions
1
Despite increasing investments in Sales and Marketing, BMC has failed to
generate meaningful ESM revenue growth
Source:
Company Filings
Note:
LTM as of 03/31/12
1.
CA Sales and Marketing expense adjusted for $22mm restructuring
charge 2.
BMC
excludes
Professional
Services
for
a
direct
comparison
with
CA’s
Enterprise
Solutions
segment;
CA
reports
Professional
Services
as
a
separate
segment
¹
ESM
²
29.2%
28.5%
2.3%
12.1% |
 [
13 ]
Q4 2011
Q1 2012
Q2 2012
Q3 2012
FY 2013 Prediction
“The assumptions
underlying our full year
fiscal 2012 expectations
include…
ESM license
bookings growth in the
low 20’s”
MANAGEMENT GUIDANCE ON ESM SEGMENT FOR FISCAL YEAR 2012
“The assumptions
underlying this full year
fiscal 2012 estimate include
total bookings growth in
the low double digits, with
the skew of full-year
booking expected in the
first half of the year to be
similar to the prior year.
ESM license bookings
growth in the mid-teens”
“Due to our performance in
the first half and our
current outlook for the
remainder of the year, we
are lowering our full year
expectations…
The
assumptions underlying
our full year fiscal 2012
expectations include: total
bookings growth in the
mid-single digits; ESM
license bookings decline
in the mid-single digits”
The assumptions
underlying our full year
fiscal 2012 expectations
include: total bookings
growth flat with the prior
year; ESM license
bookings decline of high
single digits to low
double digits
with solid
sequential growth in the
fourth quarter”
“Total ESM license
bookings were $153
million in the fourth
quarter, down 5% from
the year-ago period…
For the fourth quarter,
Numara contributed
almost 4 points of
growth to ESM license
bookings”
MANAGEMENT’S ESM LICENSE BOOKINGS GROWTH PREDICTIONS FOR FISCAL YEAR
2012 1
BMC’s
management
projected
+20%
ESM
license
bookings
growth
when
the
year
ended
with
-11%.
This
represents a profound failure to understand BMC’s underlying business
trends and challenges Where Was the Board’s Oversight During
This Colossal Failure? Q4 2012
“The assumptions
underlying our full year
fiscal 2013 expectations
include…
ESM license
booking growth in the
low double-digits…
annualized bookings
growth in the low double-
digits”
???
???
Management Has Failed to Execute
(11%)
Q2 12
Prediction
Q3 12
Prediction
Q4 12
Actual
Low Double Digits
"High Single Digits to
Low Double Digits Decline"
"Mid-Single
Digits Decline"
"Mid-Teens"
"Low 20's"
Q4 11
Prediction
Q1 12
Prediction
FY 13
Prediction |
 [
14 ]
Market
entrants
like
Service-Now
(launched
in
2004)
and
Solar
Winds
(launched
in
1999)
saw
the
opportunity
in
the
marketplace
BMC
was
late,
launching
Remedy
OnDemand
and
RemedyForce
in
2010,
which
only
generated
$10mm
of
revenues
in
FY2012
CAGR: 166%
$1.9
$8.8
$19.3
$43.3
$92.6
2007
2008
2009
2010
2011
“It’s not all going to be Software as a Service,
I’ve met no CIOs who think that”
–
Bob Beauchamp
(2007, Interview with The Australian)
BMC has been slow to adapt to changes in the market place, including a
well-publicized failure to quickly identify trends in SaaS
solutions and cloud management Source:
Capital IQ, Company Filings, News Reports
WHAT MIGHT HAVE BEEN -
REVENUE TRAJECTORY
($ in millions)
1
“SaaS initiative includes our new BMC
Remedy OnDemand Solution, which provides
customers with a full industry leading service
management offering delivered as a service”
–Bob Beauchamp
(Q4 2010 Earnings Conference Call)
“We were then late, unfortunately, as you
well know, to the SaaS market. So when it
turned to SaaS, we didn't have a great
answer at the same time”
–Bob Beauchamp
(Q4 2012 Earnings Conference Call)
Management Has Failed to Execute |
 Source:
Capital IQ, Company Filings
Note:
LTM as of 03/31/12 except HPQ which is as of 04/30/12
1.
Excludes impact of $13.6mm deferred revenue assumed in connection with
Numara acquisition 2.
Represents as reported Global Business Services segment operating profit
before tax 3.
Represents as reported Service segment operating margin
4.
Represents as reported Professional Services segment operating
margin 5.
Represents as reported Professional Services gross margin
LTM REVENUE GROWTH COMPOSITION -
BMC
LTM PROFESSIONAL SERVICES OPERATING MARGIN
During FY2012, total license revenue grew by only 1.5% and bookings
remained flat year-over-year, while Professional Services
grew greater than 20%
Professional
Services
is
–
at
best
–
a
break-even
segment
at
the
gross
margin
level
Gross margins have been historically negative with segment barely
breaking even at the gross margin level in 2012 BMC’s
only
real
area
of
revenue
growth
is
coming
from
its
low
margin
Professional
Services
segment
Management Has Failed to Execute
1
BMC’s growing Professional Services
segment barely breaks even at the gross
margin
level compared to peers who have
significant operating margins
[
15 ] |
 Deal
LTM
LTM Rev.
Target
Value
Revenues
Multiple
15
MQSoftware ¹
27
n/a
n/a
16
Emprisa Networks
22
n/a
n/a
17
Aeroprise
n/a
n/a
18
Neon Enterprise
n/a
n/a
19
Neptuny ²
20
n/a
n/a
20
OpenNetwork
18
n/a
n/a
21
I/O Concepts Software
14
n/a
n/a
22
KMXperts
5
n/a
n/a
23
DGI
3
n/a
n/a
24
Abydos
n/a
n/a
n/a
25
StreamStep
n/a
n/a
n/a
26
ITM Software
n/a
n/a
n/a
27
Corosoft Technologies
n/a
n/a
n/a
Total
$2,418
$514
Median Multiple Paid
5.8x
21 ³
[
16 ]
Poor Stewardship of Stockholder Capital
Source:
Company Filings, Capital IQ, 451 Research
1.
Phurnace
Software,
Tideway
Systems,
and
MQSoftware
were
acquired
for
combined
purchase
consideration
of
$94.3mm
per
BMC
filings;
Individual
deal
value
estimated
per
451
Research
2.
GridApp and Neptuny were acquired for combined purchase consideration of
$51.5mm per BMC filings; Individual deal value estimated per 451 Research
3.
Aeroprise and Neon Enterprise were acquired for combined purchase
consideration of $21.0mm per BMC filings 10-YEAR M&A TRACK
RECORD BMC
has
paid
significantly
high
multiples
for
its
acquisitions
27 acquisitions for $2.4 billion aggregate value
Paid high revenue multiples for relatively low revenue scale businesses
(e.g. 17.5x for RealOps, 13.3x for Phurnace, 11.7x for GridApp, 11.4x for
BladeLogic, 6.5x for Coradiant, 5.8x for Marimba)
BMC spends an inordinate amount of time on extremely small acquisition
targets Despite small revenue base, revenue growth has not
followed We
question
BMC’s
ability
to
effectively
integrate
its
acquisitions
and
maintain
their
targets’
growth
trajectories
2
BMC has an ineffective M&A track record
Deal
LTM
LTM Rev.
Target
Value
Revenues
Multiple
1
RealOps
$53
$3
17.5x
2
Phurnace ¹
40
3
13.3x
3
GridApp ²
35
3
11.7x
4
BladeLogic
811
71
11.4x
5
Coradiant
130
20
6.5x
6
Marimba
225
39
5.8x
7
IT Masters
43
10
4.3x
8
ProactiveNet
41
10
4.1x
9
Numara
300
90
3.3x
10
Tideway Systems ¹
30
15
2.0x
11
Remedy
350
250
1.4x
12
Identify
150
n/a
n/a
13
Magic Solutions
49
n/a
n/a
14
Calendra
33
n/a
n/a
($ in millions)
See Next Slide |
 Only
[
17 ]
Source:
Company Filings, Capital IQ, 451 Research
1
Represents LTM revenues of acquired companies at the time of acquisition
if disclosed 2
Represents
implied
revenues
from
acquisitions
and
organic
growth
to
bridge
from
FY2002A
reported
revenue
and
disclosed
LTM
revenue
of
acquired
businesses
to
FY2012A
reported
revenue
ANALYSIS
OF
REVENUE
GROWTH
–
PAST
10
YEARS
2
BMC has failed to meaningfully grow organically over the last
10-years Moreover, once BMC acquired its high growth targets those
same targets appear to have slowed their growth considerably once
part of BMC BMC’s acquisition strategy is an enormous use of
capital and time and doesn’t appear to help generate meaningful organic revenue growth
This calls into question BMC’s core organic growth and its lack of
progress with maintaining growth in target businesses once acquired
Likely organic revenues of less than $369 million, accounting for revenue
not reported for 16 acquisitions where targets were presumably
generating
revenues
and
for
incremental
growth
from
targets
with
disclosed
revenue
($ in millions)
10-Years of organic growth
+ Undisclosed M&A revenue
+ “Growth”
from acquired businesses
$1,289
$1,803
$2,172
$514
$369
Poor Stewardship of Stockholder Capital
FY2002
Actual
Reported Revenue
Revenue Contribution
for Acquired Businesses ¹
Implied Organic Growth
+ Undisclosed Revenue
Contribution from Acquired
Businesses + Revenue
Growth of Acquired
Businesses ²
FY2012
Actual
Reported Revenue
FY2002
Actual Reported
Revenue + Revenue
Contribution from Acquired
Businesses |
 34.2%
32.0%
35.9%
27.7%
[
18 ]
Failure to Fully Optimize Operations
Source:
Capital IQ, Company Filings
1.
Represents as reported non-GAAP operating margin
2.
Represents as reported non-GAAP operating margin
3.
Based on non-GAAP operating income of $1,647.0mm less $180.0mm
capitalized software development cost, less $89.0mm stock based compensation, plus $122.0mm of amortized software
development cost, plus $42.0mm of severance costs
4.
Based on non-GAAP operating income of $779.6mm less $132.5mm
capitalized software development cost, less $12.0mm stock based compensation associated with capitalized software
development cost, less $127.2mm stock based compensation, plus $93.6mm of
amortized software development cost HISTORICAL ESM OPERATING
MARGIN FY 2012 OPERATING MARGIN COMPARISON
HISTORICAL SERVICES GROSS MARGIN
BMC’s reported operating margin is higher than its closest peer CA,
however, expensing all of BMC’s R&D and stock-based
compensation presents a less flattering reality
Actually indicates a margin shortfall to CA
ESM reported operating margin of only 21% despite over $1 billion in
revenues BMC has only now started to generate positive Professional
Services gross profits, but 0.8% gross margin is still disappointing
Meanwhile, BMC’s “Big 3”
peers are generating an average operating margin of 11%
As Reported
Normalized
4
¹
³
²
800 bps Lower
21.0%
21.9%
21.0%
FY 2010
FY 2011
FY 2012
(6.7%)
(5.3%)
0.8%
FY 2010
FY 2011
FY 2012
3
BMC margins have not been optimized to maximize returns to stockholders
|
 12.0%
10.5%
8.7%
5.2%
$3.4
$2.2
$125.0
$107.0
$28.5
$4.8
$238.7
$48.4
$13.2
$6.3
[
19 ]
Competitive Landscape is Changing
Source:
Capital IQ, Company Filings
Note:
LTM as of 03/31/12. HPQ as of 01/31/12 since HPQ reclassified segments
during quarter ending 04/30/12 and revenue contribution from Autonomy unavailable
1.
As
of
03/18/12,
which
represents
date
on
which
Elliott’s
purchase
of
over
9mm
shares
of
BMC
began,
causing
stock
prices
subsequent
to
this
date
to
not
be
applicable
due
to
this
extraordinary
support
2.
Includes revenues from DemandTec and other acquisitions which closed in
the LTM period as of 3/31/12 3.
Includes revenues from Autonomy and other acquisitions which closed in the
LTM period as of 1/31/12 4.
HPQ
Software
LTM
revenue
growth
pro
forma
for
Autonomy
acquisition
per
Wall
Street
estimates
which
closed
in
October
2011;
not
pro
forma
for
other
transactions
given
lack
of
publicly
available
information
5.
IBM
Software
LTM
revenue
growth
pro
forma
for
DemandTec
acquisition
per
Wall
Street
estimates
which
closed
in
February
2012;
not
pro
forma
for
other
transactions
given
lack
of
publicly
available
information
RELATIVE SIZE –
MARKET CAP ¹
($ in billions)
RELATIVE SIZE –
LTM REVENUES
($ in billions)
BMC
has
long
been
the
smallest
of
the
“Big
4”
management
software
competitors,
attempting
to
compete
and
grow
on
the
basis
of
being
a
focused
BSM vendor
BMC is challenged to compete with vastly larger solutions providers who
can offer a fuller suite of products along with greater marketing heft and
overall value to the customer
Customers
are
increasingly
demanding
greater
services,
a
bundled
solutions
provider,
and
breadth
of
IT
offerings
far
beyond
what
BMC
can
offer, especially in a mature market like IT management
4
BMC
lacks
the
scale
of
its
“Big
3”
competitors
LTM REVENUE GROWTH
Even at Considerably Smaller Revenue Scale, BMC’s Growth is Extremely
Unimpressive Relative to its Competitors Software ³
Software ²
Software
4
Software
5 |
 [ 20 ]
Competitive Landscape is Changing
NEXT GEN / SAAS SYSTEMS MANAGEMENT IPOS
BMC’s
traditional
competitive
“sweet
spot”
is
under
assault
from the “Big 3”
larger infrastructure software and fast-
growing niche players
Competition continues to intensify and will continue
unabated
COMPETITIVE LANDSCAPE
EMERGING MODELS
A WINDOW TO MONETIZE IS STILL AVAILABLE
New models such as virtualization, on-demand delivery
and cloud services have upended old paradigms
Investors are keenly focused on new models and rewarded
them with successful IPOs and ever-increasing valuations
putting many potential M&A targets out of reach for BMC
Several traditional on-premise enterprise software vendors
subject to similar market and competitive forces that BMC
faces today delivered significant premiums to stockholders
by objectively evaluating alternatives and concluding a sale
was in stockholder’s best interest
Source:
Capital IQ, 451 Research
1.
Represents market capitalization as of 05/25/12
2.
Represents one day premium to unaffected stock price on 9/19/10, day
before IBM announced its acquisition of the company 3.
Represents
one
day
premium
to
unaffected
stock
price
on
3/2/10,
day
before
Elliott
announced
its
proposal
to
acquire
the
company
TEV
LTM EBITDA
Spot
($ in millions)
($bn)
Multiple
Premium Paid
Netezza ²
$1.7
86.6x
14.9%
ArcSight
1.5
57.7x
23.9%
McAfee
6.9
17.4x
60.4%
Quest
1.9
13.1x
18.6%
Sun
5.6
12.6x
42.0%
Novell ³
1.0
9.7x
28.0%
4
Traditional “Big 3”
Next Gen / “SaaS”
Equity Value
Current Equity
($ in millions)
at IPO
Value ¹
% Appreciation
SolarWinds
$814
$3,526
333%
VMWare
10,878
40,170
269%
Splunk
1,573
3,325
111%
SYSTEMS
MGMT
/
INFRASTRUCTURE
–
M&A |
 Strong Need for Improved Corporate Governance
Elliott has thoroughly evaluated BMC’s board composition and there are a
few directors with experience as CEOs and Senior
Executives
of
large
and/or
publicly-traded
companies,
with
some
operational
experience
at
Technology
companies…
CEO of Open Text and other executive positions
Chairman, CSO of
Publicly Traded
Software Company
BMC Board: 8 Years
Thomas Jenkins
Software Industry
Executive
BMC Board: 5 Years
Gary Bloom
President & CDO of Marklogic, a privately-held software
company CEO of eMeter, a private software company acquired by
Siemens Vice Chairman and President of Symantec
Chairman,
President
&
CEO
of
Veritas
Software
Also spent 3 years as a consultant to TPG and 14 years at Oracle
EVP & CFO of Autodesk and SVP & CFO of Logitech
Various positions at Dell and at HP in finance and
business-management roles
CFO, Publicly Traded
Software Company
BMC Board: 2 Years
Stephan James
Former International Chairman and COO of Accenture
Ltd.
Former COO,
Publicly Traded IT
Services Firm
BMC Board: 2 Years
Mark Hawkins
On
the
BMC
Board
for
25
years,
Mr.
Gafner
is
described
as
a
private investor, self-employed consultant in the
communications technology field, and as a former CEO of "a
privately held manufacturer of high-speed satellite earth stations
for data distribution"
CEO, Private
Company
BMC Board: 25 Years
Meldon
Gafner
On
the
BMC
Board
for
15
years,
Mr.
Tinsley
is
described
as
an
Advisory Director, former partner and Special Advisor to a
private equity investment firm
President
&
COO
of
Baan
Company
N.V.,
in
mid-
to
late-1990s,
and was previously a management consultant at McKinsey
Consultant / Advisor
BMC Board: 15 Years
Tom Tinsley
On
the
BMC
Board
for
11
years,
Mr.
Barfield
is
President
and
CEO of a private investment company
Previously Chairman and President (1995 -
2012) of the Bartech
Group, a family business founded by his father that specializes
in "human capital procurement" and "placement of engineering
and IT professionals"
Consultant / Former
CEO, Private
Company
BMC Board: 11 Years
Jon Barfield
On
the
BMC
Board
for
10
years,
Ms.
O’Neil
is
President
and
CEO of Liberty Street Advisors, a private company she founded
that advises on corporate governance, risk management,
infrastructure needs, leadership alignment and change
initiatives
Spent 9 months as General Manager of IBM's Global Financial
Markets Infrastructure Group, and spent 24 years at the Federal
Reserve Bank of New York in a series of executive roles
Consultant / Advisor
BMC Board: 10 Years
Kathleen O'Neil
Currently a "management consultant specializing in the areas of
corporate finance, accounting and strategy"
Formerly EVP and CFO of Genentech
Chairperson of Accuray, a designer of medical radiation
systems; and Allergan, a multi-specialty healthcare company
Consultant / Former
CFO, Public
Company
BMC Board: 4 Years
Louis Lavigne, Jr
5
…however, Elliott believes that BMC’s significant underperformance
is due to a deficit on the Board of relevant and timely
experience
in
Enterprise
Software,
emerging
business
models
("SaaS"
and
"Cloud"),
and
critical
skillsets
(Large
Cap, M&A)
[
21
]
Source:
Company Filings, Capital IQ |
 III. Elliott’s Proposal to Unlock BMC’s Strategic Value |
 [
23 ]
Increasing BMC’s Value to Stockholders
Value is derived from attractive assets of well-integrated,
mission-critical products; meaningful customer presence and
relevance to tens of thousands of IT organizations
To unlock BMC’s full potential, Elliott believes that BMC’s
Board needs members who are strong leaders and who offer fresh
perspectives and new ideas. We propose that our nominees, who
consist of respected technology industry executives and will work
to maximize stockholder value, join BMC’s Board Elliott has
nominated four highly experienced technology executives to the Board
If
Elliott’s
slate
of
Directors
is
elected,
we
believe
there
would
be
no
“sacred
cows”
and
a
thorough
review
of
alternatives
will
be conducted to increase stockholder value:
Explore a sale to a strategic acquirer: We believe BMC is currently
attractive to multiple acquirers at a premium price Explore a
potential sale to a financial sponsor: Private Equity buyers will be interested in the whole business and/or in
MSM at prices attractive to stockholders, and can also partner with
strategics Explore more efficient capital structures and potential
returns of capital to stockholders Benefit from a more engaged
Board who would assist with exploration of a strategic and operational review
1
2
4
3
There are Multiple Pathways for BMC to Create Significant Value for
Stockholders –
All of Which Can be Explored With a More Impactful Board
BMC
possesses
significant,
unlocked
value
that
we
believe
should
be
realized
for
stockholders |
 Opportunity to Improve BMC’s Governance
REPRESENTATIVE CREDENTIALS
Source:
Company Filings, Capital IQ
1
Former Board affiliation
2
Advisory Board
BOARD AFFILIATIONS
CEO of Engine Yard, the leading cloud platform for automating and
developing Ruby on Rails and PHP applications (2009 -
present)
CEO for Navis, Inc. (2002 to 2008), CEO for Salesforce.com
(1999 -
2001), President and CEO of Hyperion Solutions (1993 -
1999)
Five years as a nuclear submarine officer in the United States Navy
before beginning his civilian career
JOHN DILLON
Experience as CEO and Director for a
diversified group of leading publicly-
traded and private cloud computing,
SaaS
and PaaS
companies
TransAct
Technologies
Intacct
Corporation
Epicor
Software ¹
Clearwell
Systems ¹
SVP of Hewlett Packard (2006 -
2011), with responsibility for HP's
Professional Services, Consulting and Outsourcing businesses in
North America (2009 -
2011) and over 20 years in various executive
roles at Siemens AG (1985 -
2005), including CEO and President of
Siemens Communications (2004 -
2005)
Serves on the Advisory Board of leading technology companies,
including Violin Memory and Opera Solutions, a leading provider of
"Big Data" analytics
ANDREAS “ANDY”
MATTES
Experience as CEO and senior
executive for leading multinational
technology companies, including
particular expertise in Professional
Services, Consulting and Outsourcing
and "Big Data" analytics
Opera Solutions ²
Violin Memory ²
Radvision
¹
Mphasis
Ltd. ¹
CEO Experience at
Leading Technology
Companies
Software-as-a-Service
("SaaS") / Cloud
Computing
Professional Services
Organizations at
F1000
"Big Data" and
Analytics
Transformational
Acquisitions
(Opsware, Mercury)
Successful Exits
(Epicor, Vignette,
Clearwell, Radvision)
Diversified
Backgrounds (IBM,
HP, Salesforce,
Siemens, Hyperion)
EVP of Sales, Marketing & Strategy, as well as EVP of Software
& Solutions at Hewlett Packard, during which time HP acquired
leading enterprise software companies Opsware
and Mercury
Interactive, among others (2006 -
2011)
CEO of Vignette, a leading content management software company,
prior to its sale in 2009
SVP of Worldwide Sales at Siebel Systems (1999 -
2001)
17 years at IBM in various roles, including VP of Midrange Systems,
VP of Sales, Consumer Packaged Goods, and VP, Sales
Operations THOMAS HOGAN
Experience as top executive at HP's
Software and Solutions business, a
former public-company CEO and
diverse experience at some of the
world's most prominent enterprise
software companies
InForte
Corporation ¹
DataDirect
Networks ²
"JIM" SCHAPER
Founder of Infor
Global Solutions, a leading Enterprise Software
company with 85,000 customers and 13,000 employees operating
from 116 offices in 34 countries globally
Operating partner at Golden Gate Capital
Over 30 years of experience in the Technology industry
Experience as Founder, Chairman and
CEO of one of the largest enterprise
software companies in the world, and
over 30 years in the Technology
industry
Infor
Global Solutions
Attachmate
Q2ebanking Software
SnagAJob.com
Inovis
¹
Elliott has nominated four highly experienced and respected technology
industry executives who share the view that BMC is underperforming and
undervalued and who will work to explore all strategic alternatives to maximize stockholder value
[
24
] |
 [
25 ]
Explore a Sale to a Strategic Buyer
One of the leading global providers of IT management software products for
both mainframe and distributed environments BMC’s solutions
are used by more than 25,000 customers ranging from global 100 companies to smaller businesses in more than 120
countries
Comprehensive
portfolio
of
integrated
products
particularly
well
suited
for
heterogeneous
–
cross
platform,
cross
product
-
environments in the data center
Customers value BMC’s product capabilities and its ability to manage
complex heterogeneous IT environments Leadership position in key
market segments with significant cross selling opportunity IT
Service Desk (with Remedy) Datacenter Automation (with
BladeLogic) Configuration and CMDB (with Atrium)
DBMS and Asset Management
Recognized as a leader by customers and analysts
Broad ecosystem of marquee partners across ISVs, SIs, resellers (e.g.
Cisco, Accenture, Dell, CSC, Salesforce.com and others)
Mainframe
business
lends
business
and
financial
strength
–
high
margins,
strong
free
cash
flow
generation,
stable
and
predictable
business
Potential to become a more nimble provider and adapt to market
transformations such as Virtualization, Cloud Computing and SaaS
Opportunity to leverage market position and gain scale in high growth
segments such as APM, private cloud, infrastructure performance
management, MDM and service provider market BMC’s issue is its
operational execution and not the quality and value proposition of its products and solutions
BMC has significant strategic value with great assets that can be realized
through exploring an opportunity to sell the Company
1 |
 [
26 ]
ACQUIRER
ILLUSTRATIVE
EPS IMPACT
BMC Provides Significant Accretion for Possible Strategic Acquirers
TEV: $243.9
Mkt Cap: $224.1
Cash: $12.3
TEV: $115.5
Mkt Cap: $130.0
Cash: $29.7
TEV: $17.2
Mkt Cap: $21.9
Cash: $13.7
TEV: $66.3
Mkt Cap: $44.2
Cash: $8.3
Expand into Heterogeneous
IT Management Software
Consolidate IT Management
Software market
Consolidate IT Management
Software market
Scale the software portfolio
Source:
Capital IQ, Thomson Reuters
Note:
Market data as of 05/25/12, balance sheet data as of last reported
quarter 1.
Cost of debt of 8% for CA and SYMC
COMMENTARY
ACQUIRER
ILLUSTRATIVE
EPS IMPACT
COMMENTARY
TEV: $55.4
Mkt Cap: $87.5
Cash: $48.4
TEV: $47.4
Mkt Cap: $50.9
Cash: $6.3
TEV: $9.8
Mkt Cap: $10.9
Cash: $3.2
TEV: $10.6
Mkt Cap: $11.9
Cash: $2.7
Expand into Heterogeneous
IT Management Software
Pursue IT Management
Software market
consolidation
Expand into Heterogeneous
IT Management Software
(connect its Storage and
Security offerings)
Expand into Heterogeneous
IT Management Software
($ in billions, except per share data )
1
BMC offers a significant accretion opportunity to a potential strategic
acquirer Analysis presented below based on very conservative
assumptions: Does not assume any synergies (not even public company
cost savings) Assumes transaction funded with only domestic cash
available on BMC’s balance sheet and new debt (cost of debt of 6%) ¹
Assumes no cash available
from acquirer’s balance sheet
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
2.0%
1.8%
1.6%
CY 2014E EPS
2.1%
1.9%
1.7%
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
2.6%
2.3%
2.1%
CY 2014E EPS
NA
NA
NA
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
6.5%
5.8%
5.2%
CY 2014E EPS
6.4%
5.8%
5.3%
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
3.1%
2.8%
2.5%
CY 2014E EPS
NA
NA
NA
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
7.6%
6.8%
6.1%
CY 2014E EPS
9.0%
8.2%
7.4%
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
12.5%
9.7%
7.0%
CY 2014E EPS
14.8%
12.3%
9.7%
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
1.4%
1.3%
1.1%
CY 2014E EPS
1.5%
1.4%
1.3%
Acquisition Price
$52.00
$56.00
$60.00
CY 2013E EPS
13.2%
10.3%
7.3%
CY 2014E EPS
15.1%
12.5%
9.9% |
 [
27 ]
PRIVATE EQUITY RATIONALE
2
BMC Would be an Attractive Target for Private Equity
SELECTED LARGE CAP AND TECH FOCUSED PE FIRMS
Source:
Company Press Releases, Capital IQ
Alltel
$24,500
Freescale
17,600
SunGard
11,400
Avaya, Inc.
8,300
IMS Health
5,200
Sabre Holdings
5,000
Vertafore
1,400
Intergraph Corp.
1,300
SunGard
$11,400
Avaya, Inc.
8,200
Sabre Holdings
5,000
Interactive Data
3,400
Agilent
2,660
Skype [eBay, Inc.]
1,900
Serena Software
1,200
Freescale
$17,600
SunGard
11,400
Cendant (Travelport)
4,300
Emdeon
3,000
Freescale
$17,600
Open Solutions
1,300
SS&C Technologies
942
Getty Images
$2,400
Emdeon
3,000
Kronos Inc.
1,800
Intergraph
1,300
DoubleClick
1,100
Ceridian
Corporation
$5,300
West Corporation
4,100
Sword Insurance
115
SunGard
$11,400
Tex. Instr. (Sensors)
3,000
MYOB
1,250
SkillSoft
1,200
TASC [NOC]
$1,650
Emdeon
1,200
TriZetto Group
$1,400
Epicor
976
Activant
890
Sophos
830
Bankrate
571
Lawson
$2,000
SSA Global
1,700
Aeroflex
1,120
Systems Union Group
460
MAPICS
376
Datastream Systems
216
Blue Coat Systems
$1,300
SonicWALL
640
Archipelago Learning
290
Landesk
250
Double-Take Software
242
Embarcadero Tech
200
PLATO Learning
140
Entrust
114
Misys
£1,100
CDC Software
$300
Indus International
240
Sage SW (He)
£210
Intuit (RE Solutions)
$128
First Data
$29,000
SunGard
11,400
Visma
KR 5,500
Agilent
$2,660
TASC [NOC]
1,650
Flextronics
900
Quadramed
$126
Kewill plc
£87
eFront SA
€41
MSC Software
$360
First Advantage
265
Shopzilla
165
RBS WorldPay
£2,025
Fifth Third (Vantiv)
$2,350
SkillSoft
1200
Software has been a clear area of focus for the large private
equity firms
We believe private equity firms will show an interest in BMC
as a whole and the MSM business if separated
BMC’s financial and strategic profile fits the investment
criteria of private equity firms
Significant presence in a large and growing market
Attractive customer and product portfolio
High cash flow generation and margin in MSM business
Potential to improve margin in ESM business
Viable exit alternative through a strategic sale or public
market exit
Attractive financing markets have been supportive of
software take-private transactions
It
is
possible
for
private
equity
to
pay
an
attractive
premium
to
stockholders
and
still
realize
suitable
returns
for
their
investors |
 [
28 ]
Greater Opportunity to Return Stockholder Capital
BMC has significant excess debt capacity given its recurring revenue base,
stable free cash flow generation, and current net cash
position
Company can issue debt or use excess free cash flow and excess cash for
share repurchases Returning
capital
and
addressing
operational
challenges
would
yield
significant
return
Assumes
BMC
raises
$400mm
–
$2bn
to
buy
back
shares
Assumes two scenarios: pro forma impact based on standalone FY’13E
estimates and pro forma impact based on 3% operating margin
improvement on FY’13E estimates
Marginal operating improvements results in significant value to
stockholders Pro-forma LTM Net Debt/EBITDA at serviceable
levels Clearly accretive to EPS
ILLUSTRATIVE SHARE BUYBACK ANALYSIS
FY’13E EPS ACCRETION
WITH NO
OPERATING MARGIN IMPROVEMENT ¹
Source:
Capital IQ, Wall Street Research
1.
FY 2013 financial metric based on Thomson estimates as of 05/25/12.
For incremental debt up to $1.2bn, assumes 10-year notes raised at 4.5%, for incremental debt of $1.6bn assumes 7-year
and 10-year notes raised at 4.25% and 4.75%, respectively and for $2bn
incremental debt assumes 7-year and 10-year notes raised at 4.5% and 5.0%, respectively
3
Premium to share price on 05/25/2012
Debt Raised
0.0%
2.0%
4.0%
6.0%
8.0%
$400
3.6%
3.5%
3.4%
3.3%
3.1%
$800
7.6%
7.4%
7.1%
6.9%
6.7%
$1,200
12.2%
11.8%
11.4%
11.0%
10.6%
$1,600
17.5%
16.8%
16.2%
15.6%
15.0%
$2,000
22.7%
21.8%
20.9%
20.1%
19.3%
Premium to share price on 05/25/2012
Debt Raised
0.0%
2.0%
4.0%
6.0%
8.0%
$400
12.5%
12.3%
12.2%
12.1%
12.0%
$800
17.1%
16.8%
16.5%
16.2%
16.0%
$1,200
22.3%
21.8%
21.4%
20.9%
20.5%
$1,600
28.3%
27.5%
26.9%
26.2%
25.6%
$2,000
34.3%
33.3%
32.4%
31.4%
30.6%
FY’13E EPS ACCRETION
WITH 3%
OPERATING MARGIN IMPROVEMENT ¹
($ in millions)
($ in millions) |
 (As of 5/25/12)
Dividend
Company
Yield
Corning Inc.
2.3%
Broadcom Corp.
1.3%
Intuit Inc.
1.1%
Motorola Solutions, Inc.
1.8%
Applied Materials Inc.
3.4%
Activision Blizzard, Inc.
1.5%
Altera Corp.
0.9%
Xerox Corp.
2.4%
CA Technologies
4.0%
Analog Devices, Inc.
3.3%
The Western Union Company
2.4%
Paychex, Inc.
4.2%
Xilinx Inc.
2.8%
Fidelity National Info. Services
2.4%
Maxim Integrated Products Inc.
3.4%
Amphenol Corporation
0.8%
KLA-Tencor Corporation
3.0%
Linear Technology Corp.
3.4%
Median
2.4%
BMC Software Inc.
0.0%
[
29 ]
Dividends: Another Consideration
Many leading technology companies now embrace dividends to instill managerial
discipline and reward stockholders
Source:
Capital IQ
1.
Based on analysis of current dividend paying companies from set of top 100
listed domestic technology companies by market cap LISTED
TECHNOLOGY
COMPANIES
–
U.S.
HEADQUARTERED¹
3
(As of 5/25/12)
Dividend
Company
Yield
Microsoft Corporation
2.8%
IBM
1.7%
Oracle Corporation
0.9%
Intel Corporation
3.5%
Cisco Systems, Inc.
2.0%
QUALCOMM Incorporated
1.7%
Visa, Inc.
0.7%
Hewlett-Packard Company
2.4%
Mastercard Incorporated
0.3%
Texas Instruments Inc.
2.3%
Automatic Data Processing, Inc.
3.0%
Corning Inc.
2.3%
Broadcom Corp.
1.3%
Intuit Inc.
1.1%
Motorola Solutions, Inc.
1.8%
Applied Materials Inc.
3.4%
Activision Blizzard, Inc.
1.5%
Altera Corp.
0.9%
Xerox Corp.
2.4%
CA Technologies
4.0%
(As of 5/25/12)
Dividend
Company
Yield
Analog Devices, Inc.
3.3%
The Western Union Company
2.4%
Paychex, Inc.
4.2%
Xilinx Inc.
2.8%
Fidelity National Info. Services
2.4%
Maxim Integrated Products Inc.
3.4%
Amphenol Corporation
0.8%
KLA-Tencor Corporation
3.0%
Linear Technology Corp.
3.4%
Microsoft Corporation
2.8%
IBM
1.7%
Oracle Corporation
0.9%
Intel Corporation
3.5%
Cisco Systems, Inc.
2.0%
QUALCOMM Incorporated
1.7%
Visa, Inc.
0.7%
Hewlett-Packard Company
2.4%
Mastercard Incorporated
0.3%
Texas Instruments Inc.
2.3%
Automatic Data Processing, Inc.
3.0% |
 [
30]
Operational Improvements Clearly Possible
Preliminary areas of improvement
include:
Professional Services: Increase in
workforce efficiency, resulting in
higher revenue per employee
Sales & Marketing: Improvements
around coverage of clients,
standardized pricing and sales
force know-how
R&D: Cost savings by off shoring
and portfolio rationalization
G&A: Reduction in management
overhead and greater integration
of acquired companies
Elliott has conducted extensive research on BMC’s peers and concluded
that BMC can achieve meaningful operating margin expansion through
operational improvements: Resulting in improved returns for BMC
stockholders
Source:
Capital IQ, Company Filings
1.
LTM 03/31/12 operating margin based on non-GAAP operating income of
$779.6mm less $132.5mm capitalized software development cost, less $12.0mm stock based compensation associated
with capitalized software development cost, less $127.2mm stock based
compensation, plus $93.6mm of amortized software development cost
2.
Based on incremental operating earnings from potential Professional
Services gross margins of ~10% to 20% as compared to LTM 03/31/12 reported gross margin of 0.8%
4
ILLUSTRATIVE POTENTIAL OPERATING MARGIN IMPROVEMENTS ¹
Such
Improvements
Could Add
~10% to
Operating
Margins
A More
Efficient
Company
Should Also
Command a
Higher
Valuation
Multiple
Elliott’s Nominees Have Significant and Relevant Operating
Experience 27.7%
32% - 39%
2% - 4%
0.5% - 1.5%
1% - 3.5%
1% - 2%
Adj. LTM
Operating
Margin
G&A
R&D
Sales &
Marketing
Prof. Services
Earnings
Contribution ²
LTM
Operating
Margin ¹ |
 4
ProactiveNet
MainView
End User Experience Management
Remedy
Remedy OnDemand
RemedyForce
Numara (FootPrints)
Control-M
BladeLogic
Atrium
Marimba
[
31 ]
RELEVANT PRODUCTS
BMC has a well-regarded, strong and diverse set of
products
Products are positioned in extremely large and
attractive growth markets
The Company is at risk of missing the opportunity to
take advantage of these extremely large growth
markets
Elliott’s Board representatives will leverage their deep
industry knowledge and relevant prior experience to
maximize this opportunity
Our Nominees will provide strategic insight and
ask the hard questions to help get BMC back on
track
Now is the time for BMC to make the changes
necessary to capture the opportunity
MARKET POSITION
BMC
has
an
opportunity
to
take
share
and
grow
faster
than
its
markets
BMC’s Potential Growth Opportunity |
 $1.4
$1.9
2011A
2016E
CAGR: 6.2%
$17.3
$24.4
2011A
2016E
CAGR: 7.1%
$5.9
$7.0
2011A
2016E
CAGR: 3.4%
$1.8
$2.2
2011A
2016E
CAGR: 4.4%
BMC’s Potential Growth Opportunity (cont’d)
($ in billions)
4
SEGMENT
MARKET GROWTH
IT Service Desk
and Help Desk
Configuration
Management
Total
Addressable
Market
4
[
32 ]
$3.7
$6.4
2011A
2016E
CAGR: 11.4%
$4.4
$6.9
2011A
2016E
CAGR: 9.2%
Availability and
Performance ¹
Application
Management ²
Other Markets ³
Source:
Gartner “Forecast: Enterprise Software Markets, Worldwide,
2009-2016, 1Q12 Update”. Calculations performed by Elliott
1.
Includes Distributed and Mainframe
2.
Includes Distributed and Mainframe. Used as a proxy for Application
Performance Monitoring (Distributed and Mainframe) 3.
Generally, includes markets where BMC has at least 1% market share in CY
2011. Includes Asset Management, Other ITOM, DBMS Management (Distributed and Mainframe), User Provisioning, Job
Scheduling and Run Book Automation (Distributed and Mainframe), Backup and
Recovery Software (Mainframe), and Storage Resource Management (Mainframe). Job Scheduling and Run Book
Automation (Distributed and Mainframe) used as a proxy for Workload
Automation and IT Process Automation (Distributed and Mainframe)
4.
Represents
sum
of
IT
Service
Desk
and
Help
Desk,
Availability
and
Performance,
Configuration
Management,
Application
Management,
and
Other
Markets
SEGMENT
MARKET GROWTH |
 IV. Final Observations, Conclusions, and Next
Steps |
 [
34 ]
Third Party Observations On BMC
ON ESM:
ON M&A:
ON CAPITAL MANAGEMENT:
BUSINESS OUTLOOK:
“…but a closer look reveals a struggling business. The
ESM business has deteriorated
further
to
a
surprisingly
low
license
bookings
rate,
and
the
sales
force issues do not appear to be positioned to turn this around
soon....Unfortunately, it appears to us that the issues regarding
the ESM business may take even longer to rectify”
–
J.P. Morgan (Feb 2, 2012 Following Q3’12 Results)
“BMC has made a number of acquisitions in recent years, most
significantly the $800 million buyout of BladeLogic in 2008, in
order to diversify its offerings, but has had trouble
integrating
them
into
a
coherent
whole.
It
pitches
its
Remedy
helpdesk,
Patrol network management, and BladeLogic server automation tools as a
suite, but the message hasn't always resonated with
customers” –
BMC Has Multiple Acquisition Suitors
Information Week (May 25, 2012)
“We believe investors should make several adjustments to the income
statement in order to compare results…
Higher rate of capitalized Software Development
added to EPS…and…lower share count added to EPS”
–
J.P. Morgan (Feb 2, 2012 Following Q3’12 Results)
“Today, BMC uses ~100% of its FCF for stock
repurchases…however, during the previous three fiscal years,
BMC used 55% of its FCF for buybacks” –
Susquehanna Investment Group (Feb 14, 2012)
“BMC
has been using it [share repurchases] to materially reduce its share
count, and in many cases at prices well above current
levels....” –
Susquehanna Investment Group (Feb 14, 2012)
“Management’s guidance is predicated on an increase in sales
force productivity of about 1-3% on top of an increase in
productive tenured reps in the mid single digits (growth rate).
This means the average fully productive sales person will sell more,
which poses risk in our opinion, especially given the issues BMC
appears to still be struggling with in regards to the
sales”
–
J.P. Morgan (May 10, 2012 Following Q4’12 Results)
We are not the only ones who share these perspectives on BMC:
“BMC is coming off a challenging year. If it is unable to
reverse the downward trend over the next year (in alignment with
the stockholder rights plan), pressure may increase on the board to
find a buyer at levels below their current expectations. The flip
side of this likely means that even if the company doesn’t perform up
to their expectations, the stock would likely have a floor as
take-out speculation could intensify” -
RBC Capital Markets (May 18, 2012)
“BMC has historically made acquisitions to bolster growth within its
lower margin ESM segment…Numara (a SaaS-based ITSM
provider) was acquired in Jan 2012 for ~$300M and will be rolled
into ESM to expand BMC’s cloud portfolio…Growth in
bookings has been sluggish and is necessary to provide conviction on FY13
topline growth profile”
–
Jefferies (May 10, 2012)
“In other words, BMC is now in play. It's a
wake-up call that needs to be answered
with more than the same old responses from management”
–
BMC Software becomes a takeover target as investor calls for a sale
Houston Chronicle (May 24, 2012)
“BMC could be an attractive asset for the likes of Hewlett
Packard and Dell as
they try to shift from manufacturing PCs and into integrated business
service providers --
in the mold of a multi-decade turnaround at IBM. IT hardware and
software giants Cisco and Oracle could find BMC's software
services and cloud assets attractive
as they brace for competition from the likes of salesforce.com
(CRM) and peers such as SAP”
–
BMC Software Caught Between Cloud Boom And Tech Gloom
The Street (May 23, 2012) |
 [
35 ]
Conclusion & Next Steps
Our extensive research and analysis confirms that BMC has strong
products, deep customer relationships and plays in
large and growing markets
BMC has significant strategic and inherent value
that has not been unlocked for shareholders due to poor execution and
an unengaged Board
With an increasingly competitive landscape and record of significant
execution challenges, the time is NOW for BMC to consider all the
alternatives to maximize shareholder value Elliott wants to work
with the Board to help the Company capitalize on the significant value present in BMC
However, new perspectives and a thoughtful approach
is needed at the Board level in the form of new Board members
The executives Elliott has identified and nominated to the Board
have substantial experience in technology and significant
industry insight –
attributes that are essential to help drive a successful outcome for
BMC There are multiple pathways for value creation
and our Board Nominees add value across the spectrum of
alternatives As one of the company’s largest shareholders,
Elliott is committed to the process and fully intends to continue in its efforts
Elliott remains receptive to engaging in productive conversations with
the Company about the best path forward for BMC
|