Inside Wall Street: Compuware not just a takeover bet

The software company's planned IPO of one of its units and speculation about new suitors attract new investors.

By Gene Marcial Feb 11, 2013 10:11AM
Money and computer Tom Grill CorbisCompuware (CPWR) isn't one of those glamor technology stocks that attracts news headlines. But of late, it has caught some attention not only because it received an unsolicited buyout offer from hedge fund Elliott Management, but also from the way it responded to the $2.3 billion, or $11 a share, offer.

Some merger and acquisition pros expect Compuware will attract other suitors -- especially if Elliott Management, one of CPWR's largest shareholders with an 8% stake, ups the ante by raising its bid price. If that happens, expect Compuware's stock to bolt higher. It's now trading at over $11 a share, more than 22% higher since it announced its plans to take public one of its units -- Colvisint.

No matter how it goes, investors in Compuware are bound to end up winners. A few days before Elliott Management launched its buyout bid, Compuware announced a plan to carve out 20% of Colvisint, a wholly owned subsidiary, through an initial public offering in mid-2013. And here's another factor that should further enhance Compuware's valuation: It plans to spin off the remaining 80% of Colvisint stock to Compuware shareholders within 12 months from the completion of the IPO.

What's so attractive about Compuware? Its basic business is to provide software products and services to corporations in order to increase the productivity of their information technology systems. The company was initially organized to offer mainframe productivity tools that accounted for 50% of revenue. By 2012, the unit's revenue number has dropped to 42% as the company expanded its products and services to adjust for its customers' move toward their expanding Internet-related demands.

In 2009, it launched its Compuware 2.0 initiative to get into higher growth markets, such as application performance management (APM), in addition to maximizing its earnings from its mainframe and other legacy businesses. Compuware's competitors are heavyweights in the business, including International Business Machines (IBM), Hewlett-Packard (HPQ) and Accenture (ACN).

Colvisint is the unit that provides applications services. After the IPO, Compuware will focus on the rest its business, mainly the APM and mainframe solutions. Colvisint's focus will involve security and identity management in various systems, which is different from Compuware's APM and mainframe businesses.

"The IPO will help unlock the value of Colvisint and offer it greater flexibility to pursue strategic opportunities, which would boost its visibility in the marketplace," notes Joseph Cornell, president of Spin-Off Research in Chicago. This deal will enable shareholders, he says, to directly and fully participate in Colvisint's strategic activities.

In 2012, the Colvisint unit's revenues jumped 34% year-over-year, to $74 million. The increase is mainly attributed to the growth in automotive customers, continued expansion in the health care industry, and also because of the acquisition of DocSite in 2011, says Cornell.

The bottom line on CPWR: investors should consider the possibility that another suitor will emerge with a higher offer. "Compuware continues to have an open dialogue with Elliott and work with the hedge fund to enter into a non-disclosure agreement to share more non-public information," says Cornell.

But whether or not that happens, investors will still end up with a bonus: they will own shares of another up-and-coming tech company -- gratis!

gene

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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