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Compuware 18% Bump Seen After Spurning Elliott: Real M&A

Compuware Corp. (CPWR), the software maker that spurned an $11-per-share bid from activist shareholder Elliott Management Corp., is poised to fetch at least 18 percent more after leaving the door open for better offers.

The stock has traded above Elliott’s takeover price every day since Jan. 25, when Compuware rejected the bid and said it would evaluate “any credible offer it receives.” After Bloomberg News reported that Compuware attracted buyout funds including Apax Partners LLP and Hellman & Friedman LLC, the stock closed last week at $11.95. That’s 8.6 percent above Elliott’s bid, the most among pending or proposed U.S. deals of more than $1 billion, according to data compiled by Bloomberg.

Compuware’s share gains are signaling that investors expect the bidding to escalate, and MKM Partners LLC estimates the Detroit-based business software firm may lure offers of at least $13 a share. Private-equity firms might pursue the $2.5 billion company for its cash-generating mainframe business, as well as the opportunity to unlock value by selling off faster-growing divisions and cutting costs, said shareholder Integrity Asset Management LLC.

“Private equity would be a natural buyer for this company,” Aaron Schwartz, a New York-based analyst at Jefferies Group LLC, said in a telephone interview. “A mainframe business that throws off a ton of cash, a mismanaged cost structure and a growth business on an exit strategy -- that’s very appealing.”

A representative for Compuware declined to comment on whether the company had received any additional offers and what it would consider to be an appropriate bid.

Buyout Offer

Compuware provides mainframe programs, collaboration technology and project-management tools, as well as performance- management services for cloud and mobile applications. With customers including Facebook Inc., Home Depot Inc. and Amazon.com Inc., the company had sales of $971 million in the most recent 12 months.

Elliott, after amassing an 8 percent stake in Compuware, offered on Dec. 17 to buy the software maker for $2.3 billion. The $11-a-share price represented a 20 percent premium to the stock’s average during the prior 20 days. The hedge fund wrote in a letter that the software maker’s “execution, profitability and growth have meaningfully underperformed.”

Compuware rebuffed the bid a month later, saying it “significantly undervalues” the company. At the same time, it said it was being advised by Goldman Sachs Group Inc. and Allen & Co. and would “carefully review and evaluate any credible offer it receives, including from Elliott, that delivers full value to its shareholders.”

Attracting Interest

The company also announced a plan to cut at least $60 million in costs and spin off its Covisint cloud-computing software unit to shareholders after a planned public offering.

Since rejecting Elliott’s bid, Compuware has attracted interest from private-equity funds including Apax Partners and Hellman & Friedman and gave management presentations to other potential bidders including Thoma Bravo LLC and Golden Gate Capital Corp., people familiar with the matter, who asked not to be identified because the talks are private, said last week.

Compuware’s shares topped $11 every day since the company rejected Elliott’s bid and reached a more than two-year high of $12.08 on March 7. They ended last week at $11.95, 8.6 percent above Elliott’s initial bid. No other pending U.S. deal valued at $1 billion or more was trading that far above the proposed price, according to data compiled by Bloomberg.

Higher Bids

Today, shares of Compuware rose 0.8 percent to $12.04.

The interest from private-equity firms and Compuware’s decision to hire financial advisers makes investors “more optimistic that something will transpire as an alternative,” Keith Moore, an event-driven strategist at MKM in New York, said in a phone interview. “It should work out higher.”

Moore estimates that Compuware could fetch $13 to $14 a share in a takeover. Elliott may also return to Compuware with a higher bid in the range of $12 to $12.50 a share, he said.

Elliot Sloane, a spokesman for Elliott, declined to comment on Compuware’s potential to get other offers and whether it would consider raising its bid. The New York-based hedge fund now holds an 8.7 percent stake in the company, making it Compuware’s second-biggest shareholder, according to data compiled by Bloomberg.

Private-equity firms are likely drawn to Compuware’s free cash flow generation and the potential for cost cutting and asset sales, said Adam Friedman, a money manager at Rocky River, Ohio-based Integrity. The firm, which oversees about $3.5 billion, including Compuware shares, is owned by Munder Capital Management.

‘Hidden Assets’

Friedman estimates suitors may offer $13 to $15 a share for the company.

Compuware, with just $70 million in debt as of Dec. 31, generated $133 million in free cash flow in the latest 12 months.

“There’s some hidden assets in there and it is under- earning their potential,” Friedman said in a phone interview. “There’s just a lot of low-hanging fruit on the cost side and some good assets that you could either sell or run. And the cash flow is pretty good.”

The company’s operating margin in the last 12 months of 11.3 percent trailed 71 percent of North American infrastructure software companies valued at more than $1 billion, according to data compiled by Bloomberg.

Buyout firms could unlock value by continuing with Compuware’s plan to take Covisint public and seeking a sale of the application performance management division to industry suitors, said Schwartz of Jefferies.

IBM, CA

In addition to private-equity bidders, International Business Machines Corp. (IBM) and CA Inc. (CA) “stick out as potential acquirers at least for parts of the business, and even potentially the entire business,” Derrick Wood, a San Francisco-based analyst at Susquehanna International Group LLP, said in a phone interview. He estimates Compuware may lure takeover bids of $12 to $13 a share.

James Sciales, a spokesman for Armonk, New York-based IBM, and Dan Kaferle, a spokesman for Islandia, New York-based CA, declined to comment on whether the companies would consider purchasing parts or all of Compuware.

Even a boosted takeover offer of $13 a share may not be enough to win over management, according to Susquehanna’s Wood.

“Based on that price, I think management would do everything they could to argue they can create more value on their own,” he said. “They will always think they are worth more than what a financial buyer would be willing to pay.”

‘Ripe’ Target

The company may prefer to wait to seek a sale until after it sells shares in Covisint, which could help boost its valuation, said Mark Jordan, a St. Louis-based analyst at Noble Financial Group Inc.

Still, given shareholders’ frustrations with its lagging performance, Compuware may be “ripe for a takeout,” Ted Crawford, who helps oversee about $300 million, including Compuware shares, at Roumell Asset Management LLC, said in a phone interview from Chevy Chase, Maryland.

“There’s no poison pill,” Crawford said. “The directors will lose a proxy fight because of the way things have been managed to this point, and there seems to be a lot someone can do relative to how this company has been managed.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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