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SunGard Sale Has a Bright Side for Owners

At first glance, it would appear that the $9.1 billion sale, including debt, of the financial software maker SunGard to Fidelity National Information Services would be a disappointment to the private equity firms that paid nearly $11 billion for Sungard.

But looking a little more closely at the deal shows that those private equity investors can claim a modest return for their efforts.

How big a return will those firms realize? Just over 1.5 times their equity investments, according to people briefed on the matter who spoke on condition of anonymity, and most likely around 1.6 times. Some of these people estimated that the final return could be closer to two times, though another person dismissed that as too high. The actual equity that the firms put in was less than the almost $11 billion figure, which included debt.

That’s not a miss by any means. But it is far from a home run for an investment struck a decade ago, at the beginning of a leveraged buyout boom that eventually halted with the onset of the debt market decline in the fall of 2007.

Seven private equity firms — Bain Capital, the Blackstone Group, the private equity division of Goldman Sachs, Kohlberg Kravis Roberts, Providence Equity Partners, Silver Lake and TPG Capital — teamed up to buy SunGard in 2005, paying a 44 percent premium for the company, whose products are used by banks and other financial institutions.

Yet those firms had to hold on to the company for close to a decade, even as they were able to sell other investments in a much shorter period of time, and for much better returns.

The private equity investors were able to use a number of corporate finance tactics to bolster their returns on the SunGard deal. They took out about $700 million in dividends from the company, for instance.

And they broke SunGard into parts, both to raise money and to make the resulting operation more digestible to potential buyers. They sold the bulk of SunGard’s higher education business to Datatel for about $1.8 billion, creating a new company now known as Ellucian.

They spun off SunGard’s disaster recovery operations into a separate unit that they still hold. (That small business is not expected to generate a meaningful return when it is sold, some of the people briefed on the matter said.)

What was left, and what is being sold to Fidelity National, is the financial software business and a tiny portion of the education operations. All told, that accounts for just over 50 percent of the revenue that the old SunGard collected when it was acquired in 2005.

As for what Fidelity National Information Services is paying to SunGard’s owners, the breakdown amounts to:

• $2.8 billion worth of stock

• $2.3 billion in cash

• the assumption of SunGard’s $4 billion in debt

Of course, the ultimate return that the private equity consortium will reap will depend in part on the price at which those firms can sell their shares in Fidelity National. So far, investors in that company appear pleased by the transaction, having pushed up its shares 7.5 percent in midday trading on Wednesday.

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