Software AG CEO on the purpose of Silver Lake's €344 million PIPE funding

By Phil Wainewright

December 15, 2021

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Sanjay Brahmawar, Software AG (Teams screengrab)

Publicly listed software tools company Software AG this week announced a €344 million ($389m) private equity investment from Silver Lake, who will add Jim Whitehurst, former CEO of Red Hat, and Christian Lucas, Silver Lake's European co-lead, to its supervisory board. Silver Lake is known as a growth investor in the software industry, with existing investments in Cegid, Mirakl, Qualtrics, ServiceMax, Splunk and UiPath, among others. The funding for Software AG is an endorsement of its ongoing five-year transformation and growth strategy known as Helix, according to its CEO Sanjay Brahmawar, who spoke to us yesterday. He says:

If there was any doubt about whether we were going for growth or not, it should be taken away, because Silver Lake is not coming for a company that's optimizing 2% margin or something like that, that's not their thesis ...

The last two years of the five years [of Helix] are going to be about acceleration, and we felt that with a partner we could accelerate even further.

The new funding is a shot in the arm coming at the end of a tough period of transformation, he adds:

Two-and-a-half, three years of transformation is tough work. Changing the culture, we've been changing people, we've been changing the business model, we've been changing the products. I don't think there's anything we haven't touched. It's like, literally, a full surgery. So that's been tough. But we've now started seeing the results coming through, with the growth in revenue, and it's so exciting to see.

This is exactly what we needed to now give us a rocket boost. There's so much energy in the Silver Lake team. I think they're going to be just giving us that full push and I think that 2022 is going to be awesome for us. It's going to be very eventful.

US growth and acquisitions

The funding is an example of an increasingly popular investment class known as Private Investment in Public Equity (PIPE), where shares in a publicly-traded company are sold in a negotiated deal rather than through a public offering. According to Software AG, this is the largest PIPE deal to date for a European company, and the first for one listed in Germany. The stock markets were not impressed, however, as some investors had been expecting an outright acquisition following reports by Bloomberg in the past two weeks. These suggested the company was in conversations with several potential acquirers and had been speaking to Thoma Bravo and CVC Capital about a possible deal as well as Silver Lake. The company's stock had spiked on the rumors, but yesterday fell back below its prior price level once it became clear it is not being acquired.

The new funds add to Software AG's existing cash reserves of a half billion euro. They are earmarked to accelerate growth based on Software AG's cloud-native product set, with a focus on bolstering its market position in North America, and expansion through acquisitions.

Software AG's center of gravity is still its home market in Germany, and it has not been as successful as it wants to be in the US, which accounts for 50% of its Total Addressable Market (TAM). Brahmawar believes the extra visibility that comes with Silver Lake's backing will help raise its profile and boost existing efforts to expand its US market presence. As well as continuing to grow its US sales team and marketing campaigns, he says the company also plans to expand its midmarket appeal, building on early successes in the past year in the German market, where it has targeted the significant Middlestand segment.

On acquisitions, Brahmawar says the company will be looking for adjacent products and technologies to augment its existing strengths. These encompass hybrid integration and API management with its webMethods product family, IoT and analytics with Cumulocity, TrendMiner and Apama, and business transformation with ARIS. One target area adjacent to the integration and API space is data integration, data ingestion and data management. Another target area is workflow automation, which will fit well alongside the ARIS products. He explains:

We do process mining, process management. When you get that data and the intelligence, you want to feed it back somehow into your processes or your transactional systems. And that can be facilitated with workflow automation and hyper-automation. That's a high growth space, so we are looking at acquiring in that.

This is not a change from the existing acquisition strategy, but the new funding allows Software AG to be more ambitious. He adds:

We're not looking at small tech tuck-ins, we're looking at high-growth, between 10-20 million ARR companies.

Board changes

Silver Lake's advice and contacts will be an invaluable aid when it comes to M&A, he says. The investment group will also be able to "open up a lot more doors" through its broad portfolio and other connections, as well as the experience of new board member Jim Whitehurst, who serves as a Special Advisor both to Silver Lake and to IBM.

As part of the board changes, Karl-Heinz Streibich, who was CEO of Software AG between 2003 and 2018, will step down as Chairman of the Supervisory Board, with Silver Lake's Lucas expected to take over the role. Ralf Dieter, CEO of Dürr AG, is also stepping down. Silver Lake's investment was welcomed by Dr Peter Schnell, co-founder of the company and Chairman of the Software AG Foundation, which was formed in the 1990s from his then shareholding and remains the company's major shareholder with more than 30% of its stock. In an agreed press statement, he said:

We are delighted to welcome Silver Lake to the Software AG family. We look forward to seeing its impact as the Group continues its transformation towards sustainable, profitable growth. We have supported Helix since its inception, and we remain fully committed to the management team’s strategy and vision for Software AG.

The funding is in the form of 2% subordinated unsecured notes, convertible to shares after five years at a 20% premium to last Friday's closing price. On conversion, the shareholding will be equivalent to 10% of Software AG's current shares outstanding.

My take

The PIPE mechanism allows Software AG to retain its independence while still gaining an injection of cash to help accelerate its progress. Nevertheless, Silver Lake's influence is now significant, having appointed half of the four shareholder seats on the six-strong Supervisory Board including the chairmanship (in line with German law, employee representatives hold the remaining two seats). Software AG is now on the hook to meet its growth targets, too, with Silver Lake able to choose whether to take up a 10% stake or else present a bill for repayment of its debt in five years' time.

Brahmawar insists there's no change in strategy but deferred answering questions about the impact on growth targets and spending until after its Q4 earnings call in January and annual capital markets day the month after. I get the impression there's more to come following on from this new investment, which will make 2022 a very interesting year for Software AG.