However, Compuware expects to retain 20 percent of the IPO’s shares and distribute the remainder to its shareholders as of a yet-to-be-determined record date. Since Compuware has telegraphed its intention to remain Covisint’s majority shareholder, it seems likely that a significant amount of the new company’s total value will not be made available to public shareholders. This could set the stage for secondary offerings or other value-creating transactions in the future.
Timeline and Complications
Compuware has owned Covisint for about a decade. Although the division initially focused on providing e-commerce solutions to automakers and car dealers, it has since expanded its operations to other areas. Although Compuware has not given a firm date for the IPO, it seems likely to push the deal through by the end of 2013. Given the small size of the transaction and the competitiveness of the industry, it seems unlikely that major issues will arise to delay or scuttle it.
Potential Value and Possible Plays
It should be noted that the Covisint spin-off is just one of many recent IPOs in the application software and data management spaces. Indeed, investor interest in the prospects of small but powerful providers of software and cloud-based e-commerce solutions appears to be high. Recent news that Tableau Software (DATA – not yet listed) would raise the size of its IPO has fueled speculation that additional forays into the market could be forthcoming. In other words, investors who fail to see the value in the Compuware-Covisint situation have plenty of other options at their disposal.
However, investors should not discount the two companies that have a direct stake in this situation. For its part, Compuware recently announced the payment of its first-ever quarterly dividend. At 12.5 cents per share, this represents a significant annual yield of over 4 percent and provides value-minded shareholders with a rare ally in the software space.
Further, Compuware stands to earn a substantial windfall from the Covisint spin-off. Even if it does not use this cash to fund its ongoing dividend, the company could use it to wipe out its debts or invest in core areas of operation. Alternatively, Compuware could follow up on its promise to return capital to shareholders in an aggressive fashion by initiating a program of share buybacks. Since the company is clearly a potential takeover target for software-focused capital management firms, these moves could raise its eventual sale price and reward shareholders who stick with the firm.
Meanwhile, Covisint could enjoy robust growth thanks to increased demand for its services. Although its ability to compete in a competitive space remains to be seen, the company represents an exciting investment opportunity for aggressive investors who might be inclined to pass over Compuware. In sum, this spin-off situation has something for value investors and short-term players alike. Investors would do well to keep abreast of it.
The article This Spinoff May Breathe New Life into the Data Storage Industry originally appeared on Fool.com is written by Mike Thiessen.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of BMC Software. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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