BMC Software, Inc.

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BMC Software, Inc.

2101 City West Boulevard
Houston, Texas 77042
U.S.A.
Telephone: (713) 918-8800
Fax: (713) 918-8000
Web site: http://www.bmc.com

Public Company
Incorporated: 1980
Employees: 6,335
Sales: $1.32 billion (2003)
Stock Exchanges: New York
Ticker Symbol: BMC
NAIC: 541511 Custom Computer Programming Services; 511210 Software Publishers

BMC Software, Inc. is one of the world’s largest developers and vendors of independent systems software. The company made its name with programs that increased the efficiency of IBM mainframe computer systems, and mainframes continue to constitute a sizable percentage of its sales. BMC also produces software for other computer systems, including Microsoft Windows NT and XP and the Linux operating systems. BMC products perform a variety of functions: monitoring and managing service levels; improving application responsiveness; minimizing system outages; automating systems maintenance tasks; assuring data availability, integrity, and recoverability; efficiently managing enterprise storage assets; increasing network performance; and administering business integrated scheduling, output management, and security. BMC is headquartered in Houston, Texas, in its own complex of four office buildings comprising over 1.5 million square feet of area. It also has offices in Austin, Texas; Waltham, Massachusetts; and San Jose, California. More than a third of BMC’s 2003 revenues came from international sales. The company maintains offices throughout the world, including development offices in Tel Aviv, Israel; Aix en Provence, France; Frankfurt, Germany; Singapore; and, Pune, India. BMC licenses its software products to such firms as Intel Corporation, Hewlett-Packard, and Computer Associates. The company reached total revenues of $1.3 billion in 2002.

Late 1970s Origins

BMC Software began in the late 1970s as a partnership that did contract programming in the Houston area. The company took its name from the initials of the three partners: Scott Boulett, John Moores, Dan Cloer. By 1980, when it was incorporated, the 36-year-old Moores had become the company’s CEO. As a programmer with Shell Oil, Moores realized that the software written for IBM mainframes, computers that dominated business and government at the time, could be much more efficient. With that in mind, Moores developed BMC’s first product, the 3270 Optimizer, which sped up transmission by compressing data streams. To grow the young company, Moores paid top dollar to lure the best software developers and sales people to his firm. The strategy was successful, and new software poured out of BMC’s development labs. Profit margins were unfortunately low due to the company’s high salaries and generous benefit packages.

Another of Moores’s innovations was marketing BMC software by telephone. Rather than send its sales staff out to meet personally with potential clients as other firms did, BMC sales people phoned database managers at target firms. Working in this way, they could pitch products directly to the individuals responsible for purchasing them, make many more sales calls in a day, and do it all for less money. Adding strength to the strategy, BMC designed its software packages specifically to make phone marketing easier. “We develop products that salesmen can explain in two or three minutes,” BMC’s Max Watson told the Wall Street Journal. The company worked on products for which it could make a clear, unambiguous claim—for example, that a particular program performed six to ten times faster than a comparable one by IBM.

In 1982, BMC’s novel marketing methods and its IBM mainframe products attracted the attention of venture capitalist Jacqueline Morby. In BMC, she saw a company that was not living up to its potential, primarily because it was trying to develop too many products at the same time. For the next four years, Morby worked hard at introducing sound business practices at BMC. She persuaded Moores to cut back on new software development and to focus on the bottom line. By 1986, the company was earning profits equal to 20 percent of its revenues and a third of customers were from overseas.

In March 1988, BMC announced that in July it would make an initial public offering (IPO) of approximately three million shares of common stock on the NASDAQ. Company officials also hoped that the IPO would give the company visibility and prestige. The stock, which sold for between $9 and $11 a share, raised $27 million. Morby’s initial investment had increased in value from $7 to $36 million. The company profited from the offering as well. By the end of 1988, its sales had skyrocketed by 50 percent from $93 million in 1987 to $139.5 million. Profits jumped even more, increasing by 55 percent from $20.3 million to $31.4 million. Over the next two years, BMC would go on the first of many buying sprees, acquiring companies and new products. In January 1989, it purchased Trimar Software Systems Ltd. and Trimar Software International Ltd., Toronto-based companies that produced IMS-VS Fast Path software products, for $4.5 million. One month later, it purchased the rights to CTOP and CTOP III products for $2 million in cash from H&W Computer Systems. By the beginning of 1991, it had also acquired Integrity Solutions, Inc. and the DB2 General Recovery Facility product.

Diversifying in the 1990s

By mid-1991, the Wall Street Journal could report that BMC was one of the most profitable and fastest-growing firms in the software field. It had 539 employees and net income of $31.4 million. BMC’s stock had split once and was valued at $38.50 a share. Its telemarketing force was still going strong and their costs for sales and marketing were 20 to 40 percent less than competitors. The company continued to place the needs of its customers front and center, organizing regular focus groups to find out which problems needed fixing.

John Moores, the founder of BMC, had in the meantime become one of the richest men in the United States. In January 1992, Moores announced that he was retiring as BMC chairman in order to devote his time to philanthropy—he had already donated $51.4 million to his alma mater, the University of Houston, in October 1991—as well as other interests. When Moores gave up the day-to-day management of BMC in 1987, stepping down as CEO and president, Max Watson succeeded him. In 1992, Watson assumed the position of chairman as well. Soon after Moores left BMC, he founded a new software firm, Peregrine Systems, and started hiring software developers away from BMC, which responded in 1994 with a lawsuit against Peregrine and its former employees.

BMC was performing strongly in early 1992. Its stock had reached a high of $79 a share, and it had become one of the 20 largest software companies in the United States. By mid-1992, however, the situation had turned around. The stock’s value had lost nearly 35 percent by July. For the next 12 months, the company was on a roller coaster ride. Although BMC had maintained strong growth through the early 1990s, in March 1993 its stock took another jarring hit on the NASDAQ when its value dropped by 20 percent. Few investors were surprised—by then the shares had acquired a reputation as one of the most volatile issues on the NASDAQ. Mainframes were an important reason for stock’s fluctuations. By 1993, many analysts speculated that mainframe computers would soon be completely replaced by less expensive computer networks. These fears were largely unsupported by facts. BMC had managed to maintain a healthy annual growth rate of 40 percent while mainframe sales were getting sluggish. Nonetheless, in response BMC began to diversify its line of goods, in particular with software packages designed to expedite communications of mainframes in networks.

With its share price still falling in January 1994, BMC acquired privately owned Patrol Software of Redwood Shores, California. BMC paid $33.7 million for the company and an Australian affiliate. The acquisition represented a significant step away from the mainframe market. Patrol’s software was designed to use so-called smart agent technology to continuously monitor computer networks for problems or potential problems. Chairman Max Watson was careful to point out that Patrol software did not represent a shift in BMC’s essential market focus; instead, it was intended to serve as an adjunct to the company’s still-successful mainframe business.

In 1993, BMC developed a new type of pact with its largest customers, styling these arrangements as “enterprise contracts.” By March 1994, it had signed more than twenty such contracts with its largest clients. Frequently worth more than $1 million, enterprise contracts included large upgrade fees that were paid for at the time the original software was purchased. News of the deals caused another BMC slump on the NASDAQ. Wall Street was concerned that the contracts would result in increased fluctuations in BMC’s quarterly revenues. In particular, they worried that the company was giving up future sales in exchange for booking revenue right away. In response, the company maintained that it had enterprise contracts with fewer than 10 percent of its total target market. It added that the contracts did not affect most BMC products or any yet-to-be-developed goods.

By 1996, it seemed that fears that mainframes were disappearing were unfounded, and BMC had reported sizable financial growth in fiscal 1995. Sales increased to $429 million over $345 in 1994, while profits jumped to $128 million from $103 million. In November 1996, BMC’s stock split for the second time in a decade. In December, it announced plans to boost its Houston workforce by some 700 employees in the coming years. At the time, BMC employed about 1400 people worldwide. To house the new workers, BMC planned to construct a new ten-story office building next to the 20-story structure it already owned and operated on Houston’s west side.

Company Perspectives:

Our heritage is helping our customers gain business advantage through more effective use of their IT groups. We continue that today by ensuring that our customers can confidently utilize new technology and application services to fundamentally change their business models.

BMC’s success at this juncture could be attributed in part to its recent attention to network computing. In 1996, network software, fueled in large measure by its purchase of Patrol in 1994, accounted for half of BMC’s new products and about 25 percent of its sales. “We’ve gone from being a mainframe software company to one that serves the entire enterprise,” Max Watson told the Houston Chronicle. “We have not abandoned the mainframe, but we’ve taken the same valuable things we did before and spread them across many different computer platforms.” Another factor in BMC’s success was the modification of the tried and true telemarketing methods developed under John Moores. As it grew, the company found it needed staff who could call on clients personally. It therefore set up a worldwide system of sales offices. Around 1996, it began licensing its products for use by other companies for the first time. It soon boasted clients among the biggest companies in computing, including Hewlett-Packard, Intel, and even IBM, once BMC’s main competitor.

Mainframe clients, far from declining, were as strong as ever. Mainframes, it turned out, were much better than networks at handling the large streams of data that companies were increasingly required to process. The renewed mainframe vogue was reflected in a 54 percent increase in BMC’s profits for December 1998. The firm was healthy not only in financial terms. In summer 1999, P.O. V. magazine ranked BMC the top employer in the entire nation among those that “inspire employee happiness and loyalty while still finishing deep in the black.” In addition to the company’s competitive salaries and benefit packages, the magazine cited BMC’s excellent stock options plan, the free food it provided to its workers every day, the firm’s casual dress code, and perks like company basketball and volleyball courts.

BMC made three significant purchases as the 1990s drew to a close. In March 1999, it acquired Boole & Babbage, a San Jose, California-based software producer, for $900 million in stock. Analysts praised the merger for the compatibility of the two firms. Both served similar client-bases, large corporations and government agencies, with no significant overlap in product lines. Complementing BMC’s software, which was meant to insure smooth cooperation between major applications, Boole’s was designed to monitor the operations of computer networks. At the end of the same month, BMC acquired BGS Systems, Inc. of Waltham, Massachusetts, in a stock transaction worth about $250 million. BGS developed programs to improve the performance of various business computer applications. Two weeks later, BMC paid about $675 million in cash for New Dimension Software, a Tel Aviv firm whose software was designed to schedule the operation of computer applications and manage security programs. New Dimension was made a fully owned subsidiary of BMC. The additions increased BMC’s total annual revenues to approximately $1.3 billion and boosted its workforce to 5000 in 26 different countries.

Wall Street liked the developments at BMC. Over the course of 1999, the company’s stock value increased a whopping 81 percent. Much of the interest was related to fears that the so-called Y2K bug was going to cause widespread serious computer problems in 2000. Companies and governments were scrambling to make sure their computer systems could survive the change in year and were buying lots of new software to do it. As 2000 finally rolled around, BMC stock was worth approximately $85 a share. When New Year’s Day came and went with virtually no computer problems to speak of, BMC was left facing a morning after. Organizations that had bought and upgraded software at record levels in 1999 used their money for other purposes in 2000, and BMC sales fell drastically. In January 2000, BMC shares lost 36 percent of their value. In July, they dropped by another 50 percent. By October, the stock was selling for only $16.50 a share. BMC claimed that many of its customers were putting off new software purchases temporarily until the release of new IBM hardware at the end of 2000. Some analysts believed the problems were the aftermath of the acquisitions made in 1999. As if to belie that explanation, though, BMC continued to expand in 2000. In May, it acquired another Israeli software company, OptiSystems, for $70 million in cash. It was also in the midst of erecting two new office buildings to house its burgeoning operations in Houston.

Reorganizing in the 2000s

By early 2001, although stock prices had recovered slightly, the bad year had left its mark. Just after New Year’s Day, Max Watson, BMC’s longtime CEO and chairman, tendered his resignation. Watson’s tenure was a good one. Under him, BMC grew from 500 employees and annual sales of less than $100 million in 1987 to over 7000 workers and $1.7 billion in sales. Watson was succeeded by BMC’s senior vice-president of product management and development, Robert Beauchamp, who set changes in motion immediately. In March 2001, Beauchamp oversaw the move of BMC’s stock to the New York Stock Exchange from the NASDAQ, the volatile market whose reputation had suffered from the Internet stock crash of 2000. The move, it was hoped, would increase BMC’s market prestige and the stability of its stock. Beauchamp also introduced a reorganization plan that divided BMC into eleven separate business units, a strategy meant to streamline the sales and marketing forces which had been split among its various divisions and subsidiaries. Over the course of the year, BMC trimmed its workforce, eliminating mainly contract positions.

Key Dates:

1980:: BMC Software is founded.
1981:: The company records more than $1 million in annual sales.
1984:: The company opens its first international office in Frankfurt, Germany.
1988:: The company makes an initial public stock offering.
1990:: Integrity Solutions, Inc. is acquired.
1993:: The company moves from Sugar Land to a new complex in Houston’s Westchase area.
1999:: P.O.V. magazine names BMC the nation’s top employer.
2001:: New CEO Robert Beauchamp institutes a company-wide reorganization plan.
2002:: Remedy Software is acquired.

In November 2002, BMC spent $355 million in cash to purchase the Remedy Software assets of Peregrine Systems, Inc., which was going into bankruptcy. Peregrine was the company started by BMC’s founder John Moores shortly after he left in the early 1990s. BMC was on an upswing as the 2002 fiscal year ended, posting profits in the second and fourth quarters. It was not enough to bring the company into the black for the entire year, however. Revenues dropped from $1.5 billion to $1.28 billion, while the firm’s operating income fell from a $8.5 million loss in 2001 to a loss of $283.6 million in 2002. Net earnings also fell sharply, from $42.4 million in 2001 to a loss of $184.1 million the following year. Nevertheless, the gloomy financial results did not stop BMC from pursuing new acquisitions. In March 2003, it purchased Belgium’s IT Masters, a developer and producer of computer systems management software, for $42 million.

Principal Subsidiaries

BMC Software India Private Limited (India); BMC Software Israel Ltd. (Israel); Evity, Inc.; New Dimension Software, Inc.; OptiSystems Solutions Ltd. (Israel).

Principal Competitors

International Business Machines Corporation; Computer Associates International, Inc.; Compuware Corporation; Network Associates Inc.; Hewlett-Packard Company.