NEW YORK--()--Sandell Asset Management Corp., owner of approximately 2.5% of Compuware Corp (NASDAQ: CPWR), announced today that it communicated last week with Mr. Robert Paul, Chief Executive Officer of Compuware, and its Board of Directors that Sandell desires the Company to act with greater urgency to maximize shareholder value as Compuware currently trades at a significant discount to its sum-of-the-parts valuation.
In addition to the filing of the Covisint IPO, which is expected imminently, Sandell asks that the Company take immediate action to 1) rationalize its cost structure, bringing margins in-line with peers and 2) sell or spin-off its APM, Mainframe and other segments to better operationally and financially align employees and shareholders with each business unit.
To this end, Sandell sent the following letter to Compuware’s CEO and Board of Directors this morning and has made public the White Paper that it sent to Mr. Paul and Compuware’s Board of Directors last week. A full copy of the White Paper can be found here: http://www.sandellmgmt.com/news/Immediate_Value_Maximization_at_Compuware_CPWR.pdf
|December 4th, 2012|
|Robert C. Paul|
|Chief Executive Officer|
|One Campus Martius|
|Detroit, MI 48226-5099|
|cc: Board of Directors|
Dear Mr. Paul,
As you know from our prior communication with you, we are shareholders of Compuware, owning approximately 2.5% of shares outstanding, and have invested because we believe the Company is substantially undervalued with over 80%+ upside in your shares. We had hoped that the Board and management would take action to realize that potential value, but are discouraged by the lack of urgency.
While we appreciate your recent comments at the Credit Suisse Technology Conference on November 28th, we challenge you to actually follow through on these opportunities. In addition to the “imminent” IPO filing of Covisint, the Company must take action to 1) rationalize its cost structure and 2) spin-off or sell its remaining businesses in order to maximize shareholder value in the most tax-efficient manner.
Management has the tendency to over-promise and under-deliver. You are already off-track in accomplishing your financial projections for FY-2013 presented nearly a year ago at your December 2011 Investor Day. The Company has been plagued by failures of execution, most recently in poor sales performance in the APM Europe segment, resulting in a reduction in FY-2013 earnings guidance and a 12% drop in the stock. Furthermore, the Company has lagged its peer group for the past five years, underperforming the S&P North American Technology-Software Index Fund and the S&P 400 Midcap Software Index by 20% and 60%, respectively.
As we are sure you would agree, the sum-of-the-parts valuation of the Company substantially exceeds the current stock price, and a separation of these businesses would significantly enhance stockholder value. We also believe that the current conglomerate structure significantly increases the risk that the Company will not be able to retain and motivate its sales force – a risk that could undermine future growth in the APM segment. In addition, we believe there are abundant opportunities to reduce legacy costs and increase employee productivity, and in turn the Company's profitability.
We believe there are several opportunities to immediately narrow the valuation gap:
- Covisint IPO – Management has recently commented that the S-1 filing is imminent with a completion of the IPO still expected in FY-2013. Any slippage of this timing will only further damage management’s credibility.
- Cost rationalization –LTM operating margin (GAAP) is 60% and 30% below its mainframe and broader software peer groups, respectively. Management can improve profitability via redundant personnel and facility elimination and providing long-term compensation incentives for management based on unit level profitability targets.
- Sell / Spin-Off APM – The recent acquisition of competitor OPNET by Riverbed Technology at 4x EV/revenues highlights the strategic value of this business. Based on our industry discussions, the Gomez-dynaTrace APM business should command a premium valuation to OPNET. A sale or spin will ensure that key management and sales people at APM stay financially motivated to grow the APM business.
- Sell Mainframe and remaining assets – Compuware should sell Mainframe to financial or strategic parties to maximize the unit’s significant free cash flow generation. An LBO of Mainframe could comfortably generate a 20% IRR. We believe that Uniface, ChangePoint and the Professional Services unit are also better suited with third parties.
We implore management to capitalize on these opportunities as investors can no longer sit around and simply listen to management comment about how they can improve the Company’s valuation. It is time for action, not more empty statements of intent. Should you fail to promptly take steps to increase stockholder value, we would favor a change to the Board composition at the next annual meeting.
|Thomas E. Sandell|
|Chief Executive Officer|