Paul Singer, the founder and CEO of $20 billion hedge fund Elliott Management Corp., has offered to buy the public software company Compuware Corp. ( CPWR ). Singer bid $11 per share for all of its outstanding shares. Compuware's shares had traded for between $7.35 and $9.53 in the past 52 weeks before the offer was made. Shares then jumped 17% to as high as $11.16 on news of the offer Monday and are priced at $10.76 in Tuesday trading.
Compuware Corp. is focused on optimizing technology for other businesses, ensuring that the world's most important technologies perform at their peak. Its clients include 46 of the top 50 Fortune 500 companies and the majority of the most-visited U.S. web sites.
Its biggest competitors include IBM ( IBM ) and Microsoft ( MSFT ), and its business is partially dependent on one of them. The company says that "a substantial portfolio of our mainframe segment revenue is dependent on our customers' continued use of International Business Machines and IBM-compatible products."
Compuware's stock had increased 7% over the past five years to the Friday prior to Elliott's offer. In the same period, its revenue per share increased at an annual rate of 3.7%, EBITDA at 9.7% and book value at 8.9%. Free cash flow declined 3.7%, and remained around $100 million to $200 million for the past decade.
Though gross margins declined for the past three years, they have been in an overall incline over the decade.
The company warns that lower volumes of software license sales for its mainframe solutions in recent years and the first half of 2013 is causing a decline in its mainframe revenues, which it expects to continue. The changing spending habits and IT computing environments of its customers are causing the declines in volume. Declines in revenue are resulting from increased competition and pricing pressures.
In addition, General Motors ( GM ) in July 2012 announced it would significantly reduce its outsourced information technology services over the next three to five years, which could quickly reflect in Compuware's revenue and contribution margin.
Another GuruFocus value investor, Dodge & Cox , is as of Sept. 30, 2012, the largest institutional investor of Compuware, with 12.09% of its shares. As of Nov. 15, 2012, Elliott Management is the third largest, with 5.66% of the company, after buying 6,336,595 shares. Its total ownership stands at 12,072,033 shares.
Elliott has a history of making long-term investments in companies and working to create shareholder value, such as with URL Pharmaceuticals, WorldCom Communications, Horizon Offshore and Adelphia Communications. Most of the companies it invests in are later acquired by other companies.
Its past technology plays include Novell, MSC Software, Blue Coat Systems, and others.
In the second quarter of 2012, Elliott Management took an activist position of 10.4 million shares in another tech company, BMC Software ( BMC ), and pushed to have several representatives from the hedge fund join its board.
Singer in March issued a presentation highlighting the weaknesses in BMC's business execution and pushing its campaign to add new directors to its board. In the document, it called BMC "not a good - but a GREAT - company that can return significant and long-overdue value to its stockholders if it chooses to embrace new Directors with new ideas."
The full stockholder presentation on BMC is available here.
Singer's two board members joined the board in July. In October, Reuters reported that the company was exploring a potential sale.
BMC has several things in common with Compuware, such being small compared to competitors and facing increasing competition.
Compuware has not responded to Singer's proposal yet and is still reviewing the proposal with its financial and legal advisers.
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