Seven private investment firms acquired 100% of the outstanding stock of SunGard Data Systems Inc. (SunGard). SunGard is a financial-software firm known for providing application and transaction software services and creating backup data systems in the event of disaster. The company’s software manages 70% of the transactions made on the NASDAQ stock exchange, but its biggest business is creating backup data systems in case a client’s main systems are disabled by a natural disaster, blackout, or terrorist attack.
Its large client base for disaster recovery and backup systems provides a substantial and predictable cash flow. Furthermore, the firm had substantial amounts of largely unencumbered current assets. The deal left SunGard with a nearly 5-to-1 debt-to-equity ratio. Why do you believe lenders might have been willing to finance such a highly leveraged transaction?