Updated New York-based hedge fund Elliott Management has been on the hunt for undervalued software companies in which to invest. A few years back, it tried to buy Novell and failed in the attempt. But last month Elliott started amassing shares in Compuware, a systems and application management software maker, and now it wants the whole enchilada.
Elliott, which is run by billionaire Paul Singer, took a big bite of out Emulex last week, and began adding Compuware shares to its portfolio in November, according to a filing with the US Securities and Exchange Commission.
As of November 26, Elliott and its subsidiary funds had built up a 5.7 per cent stake in Compuware, and as of Monday morning that stake had risen to 8 per cent.
Elliott was founded in 1977 and has over $20bn in assets under management across its private equity and hedge fund operations; the company doesn't shy away from tech investments, and has positions in Brocade Communications and Iron Mountain, as well as Emulex.
The attempted $2bn acquisition of Novell back in early 2010was a relatively big deal for Elliott, and only represented a 20 per cent premium at the time and net of Novell's cash was only worth about $1bn, and therefore not particularly generous. And hence shareholders didn't go for it, and later that yearAttachmate was able to scarf Novell up for $2.2bn.
The $2.3bn offer by Elliott to take Compuware private represents a 15 per cent premium over the market capitalization of the software company after the market closed last Friday. Again, this is not particularly generous, but Compuware is not sitting on nearly $1bn in cash as Novell was. In fact, Compuware – founded in 1973 in Detroit where it is still headquartered – has seen its relatively small cash pile get smaller and smaller thanks to the Great Recession and the company's expansion into the cloud from data centers.
The company had $286m in the bank when the recession started in its fiscal 2008, which ended in March of that year. As fiscal 2012 came to a close in March of this year, its cash was down to $99m. Revenues at Compuware were at $1.23bn with net income of $134m in fiscal 2008, and even as revenues took their hits in during the recession, falling to $1.09bn in fiscal 2009 and $892m in fiscal 2010, net income actually went up to $140m and $141m, respectively, in those years.
Revenues at Compuware started growing again in fiscal 2011, up 4.1 per cent to $929m, and again in fiscal 2012, up 8.7 per cent to $1.01bn. But net income fell over those years and was only $107m in fiscal 2011 and an even lower $88m in fiscal 2012. In the trailing two quarters of fiscal 2013, the shrinkage has continued, with the company's sales down 8.9 per cent to $446.8m and net income down 46.9 per cent to $21.1m over the six months.
Part of Compuware's problem is that the IBM System z mainframe has been at the tail end of one cycle throughout calendar 2012, with the new machines just now ramping. And its Covisint cloud management tools have been growing fast – so much so that the company announced last Friday that it is going to pull an EMC-VMware gambit, and has submitted a confidential draft registration with the SEC to take the Covisint subsidiary public.
This is how companies try to further "unlock shareholder value" these days, by taking companies public that are already, technically speaking, public. (If you own shares in Compuware, you already own a piece of Covisint. Or at least that is the way it is supposed to work before The Producers became a business model instead of a joke.) The mainframe cycle will begin again, and Compuware will be able to stop the revenue slide and perhaps boost profits, as it was able to do in the belly of the recession.
In a letter sent to the Compuware board on Monday, Elliott said that its offer actually represents a 25 per cent premium over Compuware's share price before the software company disclosed in its SEC filing that Elliott was scarfing up Compuware shares.
"Compuware is a long-established company that we have followed closely for several years," Elliott said in its statement, which was put out by portfolio manager Jesse Cohn. "We believe in the quality of Compuware's assets – however, its execution, profitability and growth have meaningfully underperformed. Prior to the filing of our 13D, Compuware's stock has underperformed the Nasdaq and S&P 500 by an average of 6 and 34 percentage points over the last one and two years, respectively."
El Reg contacted Compuware for comment on the $11 per share unsolicited bid from Elliott to take the company private, but representatives had not responded by press time. ®
Updated to add
After this story went to press, El Reg received the following statement from Compuware:
"Compuware confirmed today that its Board of Directors has received an unsolicited, conditional, non-binding proposal from Elliott Management Corporation to acquire all of the outstanding shares of Compuware for $11.00 per share. The Board said it will review all aspects of the proposal in consultation with its financial and legal advisors in due course. The Board emphasized that shareholders need not take any action at this time."