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Is CA Considering Consensual Acquisition-Merger with BMC?

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Shares of CA Inc. (CA - Free Report) jumped over 16% in yesterday’s after-hours trade, following Bloomberg’s reports, citing anonymous sources, that the company is considering a consensual acquisition-merger with BMC Software. The transaction will bring together two of the largest IT management software companies in the U.S.

Per the report, the two companies have been in talks with banks to execute this transaction. The deal is said to be of a leveraged buyout kind. At yesterday’s closing price, CA’s market capitalization is slightly over $13 billion.

The deal is likely to be funded by investment institutions and equity financing from owners of BMC, Bain Capital and Golden Gate Capital. Notably, BMC went private after the two private equity firms acquired it in 2013, for a deal worth approximately $7 billion.

According to Bloomberg, if the deal materializes, this will be the largest leveraged buyout since Dell’s transaction of approximately $25 billion.

Founded in 1974, CA has seen its ups and down. After having some better years in late 1990s, the company saw some worst years in early 2000 when the U.S. Department of Justice found it faulty in revenue recognition. The scandal had put several of CA’s senior executives in jail.

The company, however, managed to recover from the situation. However, now, once again it is facing another challenge in the form of declining revenues. Since fiscal 2013, the company has registered revenue decline in every fiscal. In the last quarter too, its revenues were flat on a year-over-year basis. Also, for fiscal 2017, the company witnessed a year-over-year 1% decline.

Notably, the stock has underperformed the Computer-Software industry in the last three years. The stock just returned 9.8%, while the industry gained 47.2% in the said period.

Being a late entrant in providing cloud-based solutions, CA is losing business to other rivals which have already shifted their business model to cloud, in our opinion. Apart from this, entry of other cloud-based solution providers has also been hampering its business.

Therefore, upon completion of the acquisition, we believe the new management may take the company to new highs. Also, if the deal materializes, we anticipate the integration to be smooth as both CA and BMC have almost similar kind of business.

Currently, CA carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector are Applied Optoelectronics Inc. (AAOI - Free Report) , DST Systems Inc. and Intuit Inc. (INTU - Free Report) . While Applied Optoelectronics sports a Zacks Rank #1 (Strong Buy), DST Systems and Intuit carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics, DST Systems and Intuit have long-term expected EPS growth rate of 20%, 10% and 14.2%, respectively.

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