Tickers in this Article: QSFT, DELL, CA, IBM
Lower-growth tech investments can be tricky, as the Street is often slow to reward consistent cash flow growth in favor of impressive revenue growth. In the case of Quest Software (Nasdaq:QSFT), though, patience is showing that value almost always eventually gets its due recognition.

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A Low-Key Bidding War
Quest Software has been a rumored acquisition target for quite some time, as the company would offer an acquirer a platform-neutral array of software offerings in database development, identity management, performance monitoring and data protection. Although definitely not a household name, Quest has trafficked in shortfalls at Microsoft (Nasdaq:MSFT), IBM (NYSE:IBM) and Oracle (Nasdaq:ORCL) to build simpler-to-use solutions that has given it a large and diverse customer base.

For the past three months, those buyout prospects have come home to roost in a significant way. While subsequent filings showed that there was a long courtship process, Insight Venture Partners and Quest publicly announced an agreement in early March whereby Insight would acquire the company for $23 per share in cash. This was not a shocking offer; not only because Quest's shares had been undervalued, but also because of a long relationship between CEO Vinny Smith and Insight.

Whether in recognition of the potential appearance of conflicts of interest or a simple desire to do right by shareholders, the board at Quest structured the deal in such a way that the company had a relatively lengthy window to solicit or receive better offers, with minimal financial risk back to the company. That has proven to be a key allowance, as the company has in fact gotten repeated expressions of outside interest.

Management announced early in May that "multiple" bidders had stepped up to show interest. About a month later, the company announced a concrete proposal for $25.50 per share, but the buyer was not identified. Shortly thereafter, Insight answered back with a $25.75 bid. And now, a week later, the company has announced another external bid for $27.50 in cash.

SEE: Analyzing An Acquisition Announcement

Who Is the Competition?
To Quest's credit, they are keeping everything quiet, but that isn't stopping the rumor mill from churning. Specifically, the rumor mill has focused on Dell (Nasdaq:DELL) as the mystery bidder, and this is a reasonable assumption. Dell badly wants to build a software business that can match other hardware and software dual-threats like IBM, Hewlett-Packard (NYSE:HPQ) or Oracle. Although Quest has not been posting great revenue or bookings growth, the company has a lucrative service business that can generate profitable business while Dell addresses those growth challenges.

But it's worth mentioning that Quest did attract "multiple" interested parties not so long ago. In addition to Dell, there could be other private equity groups interested, as well as other publicly-traded companies. After all, it's not hard to argue that Quest shares are worth $27 or $28 just on the value of the maintenance business alone.

Both CA Technologies (Nasdaq:CA) and BMC (Nasdaq:BMC) could use Quest to meaningfully grow their presence in database, identity management, performance monitoring, data protection and migration - areas in which one or both companies already compete. IBM, too, could see some utility in Quest as a fit with Tivoli and its systems management efforts. There's also a slim chance that a security or storage company like Symantec (Nasdaq:SYMC) or EMC (NYSE:EMC) could have expressed interest, but the latter seems unlikely.

SEE: 6 Free Alternatives To Your Favorite Software

Two Entertaining Alternatives
There are also two less likely, albeit highly entertaining, potential suitors. About one-third of Quest's revenue (and likely even more of its profits) comes from TOAD (Tool for Oracle Application Developers), and Oracle could perhaps leverage those as value-added add-ons for its database customers, to say nothing of moving further into areas like performance monitoring, migration, and data protection.

At the same time, HP could be interested in Quest, both for its systems management capabilities and for added leverage and irritation towards arch-rival Oracle. HP is currently suing Oracle over its decision to stop supporting certain HP offerings, and perhaps a potential threat to Oracle's database business would force an accommodation. I don't actually believe that either company is involved (HP has enough problems with its Autonomy software business and Oracle is seldom this quiet), but it makes for amusing speculation.

The Bottom Line
As an owner of Quest shares, I certainly have a vested interest in seeing this bidding war continue with ever-higher bids. I believed that the initial $23 bid was much too low, and I'm gratified to see that at least one other party happens to agree with me. I do believe that the recent bid of $27.50 is at least close to fair, though I believe an argument for $30 can be made.

Those holding on to Quest shares should sit tight - at least until Insight announces that it won't raise its bid again. On the other hand, I would not recommend these shares for new money - there may be an opportunity to buy today and get a higher takeout price, but that seems like a pretty speculative play given the modest potential gains.

Stephen Simpson has held shares of Quest Software since April 2010.

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