New offer may spark bidding war for Quest Software

(Reuters) - Quest Software Inc QSFT.O said a strategic bidder proposed to buy the maker of enterprise management software for about $2.15 billion in cash, trumping an earlier offer of nearly $2 billion from private investment firm Insight Venture Partners.

The new offer of $25.50 per share from the unidentified bidder is a 7 percent premium to Quest's Wednesday close of $23.86. Quest shares were up 9 percent at $26.01 on Thursday, signaling that investors are expecting a higher bid.

Reuters had reported that Dell Inc (DELL.O) was planning to offer between $23 and $26 per share to buy the software maker, but that those talks fell through earlier this month.

Dell has been snapping up companies as it looks to diversify and become a one-stop shop for IT needs of corporations and Quest's portfolio of backup software and security software could prove attractive to the company.

"If you make me put odds on it, I'll put better than 50-50 odds that it is Dell," Wunderlich Securities Inc analyst Brian Freed said.

Aliso Viejo, California-based Quest's database management systems could also prove complimentary to Oracle Corp's (ORCL.O) database offerings.

Apart from Dell and Oracle, BMC Software Inc (BMC.O), CA Inc (CA.O) and Microsoft Corp (MSFT.O) have been reported as possible bidders.

Big companies can bid aggressively for smaller players with a key technology, as was the case when Dell and Hewlett-Packard Co (HPQ.N) got into a bidding war for data storage company 3Par Inc in 2010. Dell sparked off that fight with an $18-a-share bid, but HP ended up buying the company for $33 a share.

And there may be a lot of upside left in Quest's price.

"The offer from Insight was in the bottom 10 pct in the valuation range for software companies in the sector over the last two years," analyst Freed said.

MATCHING BID

Quest agreed to be bought by Insight for $23 per share in March. However, the software company also said it was looking for a better offer.

The company had said that while it had received multiple alternative proposals, Insight would have the right to match any rival offers.

Quest said on Thursday that while the latest offer was superior, its board has not yet changed its recommendation on the pending transaction with Insight.

If Quest were to strike a new deal, it will have to pay Insight a break-up fee of either $4.2 million or $6.3 million, depending on the timing of the deal.

"It's a very small breakup provision," Wunderlich's Freed said, adding that it was "recognition by management that there were likely other buyers at higher levels."

Quest is led by Chief Executive Vinny Smith, who has served as either the chairman or the CEO for more than a decade.

Smith owns about 34 percent of Quest's equity.

(Reporting by Supantha Mukherjee and Sruthi Ramakrishnan in Bangalore; Editing by Supriya Kurane, Anthony Kurian, Saumyadeb Chakrabarty)