BluePhoenix Raises a $35 Million War Chest

Published: November 26, 2007

by Timothy Prickett Morgan

BluePhoenix Solutions, the Herzliya, Israel, software company that provides legacy application modernization tools for the System i midrange and System z mainframe platforms, said last week that it is raising a $35 million war chest.

Specifically, BluePhoenix says it is selling 2 million shares at $17.50 a pop in a private placement, which is a different way of raising money than from a public offering. BluePhonix is already a public company, of course, and is traded on the NASDAQ National Market. But of the 17.97 million shares the company has controlling its ownership, only 6.3 million of them are in the public markets. The private placement is a means of letting so-called sophisticated investors--such as pension funds, trusts, stock funds, and other entities that do not need the regulatory and reporting protections of the public markets--invest cash in the company. BluePhoenix is not obligated to say who is investing in the private placement, and in fact, it really doesn't have to say much at all about it other than the fact that it is happening.

In addition to the private placement, BluePhoenix is also providing these investors with warrants to acquire 800,000 shares at a price of $21.88 a piece over the next five years, which is a 25 percent premium over the stock sale price. This premium is a sweetener for the private placement deal, and is commonly used in such deals. How this works is a mystery to me, but it seems likely that the company doing the investing can buy at a price that will ultimately be lower than the striking price on the street at some future date. So the investor gets to keep the spread between the striking price and the warrant price.

"We are pleased with the high level of interest in the company shown in connection with this offering," said Arik Kilman, chief executive officer at BluePhoenix in a statement announcing the private placement and warrants. "We expect that this round of financing will enable us to more effectively pursue our growth strategy and better position us to tap the growing market for legacy modernization."

BluePhoenix says that it will use the proceeds of the private placement to repay debts, as working capital, and potentially to make acquisitions. In August, BluePhoenix expanded beyond its mainframe customer base when it merged with ASNA, which cost $7.5 million with some extra dough coming to ASNA shareholders if that part of the BluePhoenix business hits sales targets. As for potential acquisitions, there are, of course, other legacy platforms that need to be modernized for a Web and SOA world, but none are as broad or as deep as the i5/OS and z/OS platforms, respectively. It seems reasonable that BluePhoenix will try to build out its tools in the System i and System z markets rather than move into the OpenVMS or MPE spaces.

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