At the end of 2012, Elliott Management Corp offered to acquire at around $11 per share, with a total transaction value of $2.3 billion. However, Compuware Corporation (NASDAQ:CPWR) has rejected Elliott’s bid, as it thought that the offer was too low and not in the shareholders’ best interest. In addition, Compuware Corporation mentioned it was looking for a better offer from different buyout firms. Let’s look closely into the company to determine the intrinsic value range for Compuware.
Compuware, founded in 1973, is the provider of software solutions, professional services and application services, with six main business segments: Application Performance Management (APM), Mainframe, Changepoint, Uniface, Professional Services and Covisint Application Services. The majority of its revenue, $419.3 million, or 41.6% of the total revenue, was generated from the Mainframe segment. The second biggest segment was APM, with $270.4 million in revenue in 2012. The Professional Services ranked third, contributing more than $151.5 million in revenue. Compuware seems to have a diverse customer base, as it hasn’t had a single customer that accounted for more than 10% of the total revenue in the past 3 years.
Historical Fluctuating Performance
In the past 10 years, its revenue, EPS, and cash flow have been fluctuating. The revenue has decreased from $1.37 billion in 2003 to $1 billion in 2012, and the net income experienced a decline from $103 million to only $88.4 million in the same period. However, EPS has been rising, from $0.27 to $0.40 in the past 10 years. The rise in EPS was due to the significant and continuous reduction in the number of total shares standing. In 2003, Compuware had 382 million outstanding shares. In 2012, the number of shares outstanding has been shrinking to only 220 million. Compuware operates with a quite strong and conservative balance sheet. As of December 2012, it had $1 billion in total stockholders’ equity, $65 million in cash and $70 million in long-term debt. As the company has been growing via acquisitions, it recorded a huge amount of goodwill and intangibles: $920 million in December 2012. Thus, the tangible book value was quite low, at only $0.62 per share.
An $11 Offer is not Enough?
Elliott Management is one of Compuware’s largest shareholders, with around 8% stake in the company. In the letter to Compuware’s board of directors, it mentioned although Elliott believed in the quality of the company’s assets, the company’s profitability, executive and growth have significantly underperformed. Elliott stated that Compuware’s stock has underperformed the Nasdaq and S&P 500 by 16 and 34 percentage points, respectively, in the past 1-2 years. Thus, it offered to buy Compuware at around $11 per share. Robert Paul, Compuware’s CEO, said that an $11 offer “does not take into account our progress returning the business to profitable growth and our future prospects.” The company would continue with its 3-part plan. First was a 3 year cost reduction program that should cut expenses by at least $60 million. In the full year 2014, the program intends to save at least $20 million. Second was to sell 20% of Covisint in the form of an IPO, and the remainder would be distributors to Compuware’s shareholders. Last but not least, it would pay investors a dividend yield of more than 4.5%.
Peer Comparison
At the current price of $11.84 per share, the total market cap is $2.5 billion. The market is valuing Compuware at 15.35x EV/EBITDA. Compared to its bigger peers, including BMC Software, Inc. (NASDAQ:BMC) and CA Technologies, Compuware seems to be the most expensive company. CA Technologies is the biggest company among the three with a $11.2 billion market cap. With a trading price of $24.56 per share, CA Technologies is valued at only nearly 6x EV/EBITDA. BMC, with a trading price of $40.54 per share, is worth $5.8 billion on the market. The market is valuing BMC at nearly 9.8x EV/EBITDA. Interestingly, CA Technologies generated the highest operating margin at 30%, while the operating margins of Compuware and BMC were 12% and 21%, respectively.
Foolish Bottom Line
Among the three, CA Technologies seems to be a better bet than both BMC and Compuware due to its lowest valuation and highest operating margin. A $2.3 billion offer would value Compuware at as high as 14x EV/EBITDA. With a high EV multiple, I would not touch Compuware at its current price.
The article How Much is Compuware Corporation (CPWR) Worth? originally appeared on Fool.com and is written by Anh Hoang.
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