Original URL: http://www.theregister.co.uk/2013/01/28/compuware_rejects_elliott_offer/

Compuware to hedge fund: Take your cheque for $2.3bn and get outta here

Software biz is not for sale... at that price

By Timothy Prickett Morgan

Posted in Business, 28th January 2013 10:22 GMT

After a little more than a month of careful consideration, systems and application performance management software maker Compuware has told Paul Singer, who runs the Elliott Management hedge fund, that he can keep his $2.3bn and that Compuware is not for sale.

Well, not at that price, anyway. Every public company is always for sale by definition, and for a high enough price most private ones are, too.

Back on December 17, just days after Compuware had filed a confidential draft registration with the US Securities and Exchange Commission to spin off its Covisint division in an initial public offering, Singer's Elliott Management, which made an unsuccessful run at commercial operating system and groupware maker Novell a few years back and which just acquired a chunk of Emulex as 2012 came to a close, offered $11 per share to take all of Compuware, including Covisint, private.

At the time the deal was announced on December 17, the $11 per share offer, for $2.3bn, represented about a 15 per cent premium over the market capitalization of Compuware prior to when the news of the deal hit the street. As El Reg pointed out back then, Compuware is not sitting on buckets of cash like Novell was, but as its revenues have dropped during and in the aftermath of the Great Recession, the company has been able to boost its profits.

Last week, Compuware reported its financial results for the fiscal 2013 third quarter ended in December, which showed modest improvements on the revenue and profit fronts. In the quarter, overall sales were up 1.9 per cent to $257.9m, with a mix of ups and downs across product categories. Software license fees were up 13.5 per cent to $64.8m; maintenance fees were down 4.2 per cent to $102.3m; subscriptions fees (mostly for cloudy products) were up 4.3 per cent to $20.8m; professional services were down 9 per cent to $46m; and application service fees (all of it the Covisint products) rose 28.3 per cent to $23.9m. Compuware's Application Performance Management products had $85.1m in sales, its Changepoint line had $10.6m in revenues, and its mainframe performance monitoring and management products brought in $92.5m; the Uniface application modernization tools had $12.7m in sales. Add it all up and take out the costs of doing business, and net income in the quarter rose 17.4 per cent to $25.3m. The company's cash at the end of the quarter was $64.9m and it had $70m in long-term debt.

On Friday, after announcing rejection of the all-cash offer from Elliott, Compuware's CEO Bob Paul said that one of board's reasons for the rejection of the offer was that the Elliott deal did not adequately take into account of the potential growth of the APM and Covisint lines. He added that these particular lines had grown 17 and 27 per cent sequentially in the third fiscal quarter, respectively, and that these ranges' longer-term growth prospects would be sustained at between 20 and 30 per cent. Now that IBM is revving up its System z12 mainframes, Compuware is also seeing a bump, with its mainframe software sales up 17 per cent sequentially as well.

A cynic would say that Elliott might have guessed as much and offered to buy the company at $11 a share because Wall Street was not valuing these two businesses properly and soon would. And in fact, with Compuware trading at $11.57 per share when the market closed on Friday, it is now clear that Elliot is going to have to pony up more money if it wants to buy Compuware.

"As we told Elliott this morning," Paul said in a call explaining the rebuffing of the all-cash offer, "we took the proposal very seriously and spent considerable time analyzing it and reviewing the company's alternatives. We left no stone unturned in our review and analysis of the options to create shareholder value."

And in the final analysis, Compuware's board said the deal was inadequate, but that the company had its own plan for boosting sales, profits, and the share price of Compuware, making a takeover unnecessary.

The plan calls for Compuware to spin off 20 per cent of the shares in Covisint, which Compuware acquired in February 2004, in an initial public offering with a date that has not yet been divulged. Rather than retain the other 80 per cent of the shares (as EMC has done with server virtualization juggernaut VMware), Compuware plans to give the remaining Covisint shares to Compuware shareholders. There are too many unknowns right now to figure out what Covisint might be worth and how its value will impact the value of Compuware once this math is done. The division sells application integration, collaboration, and other cloudy tools tuned specifically for healthcare, manufacturing, and energy companies.

Paul said that the distribution of Covisint shares to Compuware shareholders would be done within 12 months after the IPO.

In addition, Compuware is going to do some cost-cutting and thinks it can remove $20m in costs in fiscal 2014 and at least $60m over the next three fiscal years. Additionally, it will be ponying up 50 cents per share as an annual dividend to give shareholders a little cash to keep them sweet. The dividend will not be funded from the Covisint IPO, since all of the money that is raised in the IPO will stay with Covisint. The company will also work to pay down its debt and continue to do share buybacks, but the CEO conceded in the call that debt payoffs and share buybacks may not continue at the same rate while the dividend is being paid out as well.

Paul added that the firm was working on a standard NDA agreement with Elliott so that the hedge fund could see some more internal financials and thus appreciate why the proposed acquisition offer was rejected. He wrapped up by saying the company was open to better deals.

"The board will carefully review and evaluate any credible offer received, including from Elliott, that delivers full value to our shareholders," Paul said. "We have spoken to Elliott throughout this process and will maintain an open door for dialogue with them."

Being spurned is part of the game, and Elliott is still interested.

"This is a good outcome," said Jesse Cohn, the portfolio manager who is running the deal to try to take over the systems management software company, in an emailed statement to El Reg. "Compuware has granted our request for access to diligence to confirm an offer for the Company. We will immediately reach out to negotiate an appropriate non-disclosure agreement and look forward to moving quickly to engage in diligence with the help of our legal and financial advisors. We remain very interested in the company." ®