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Shares of Compuware (CPWR) spiked up almost 13% in Monday's trading session. The provider of computer mainframe services, software solutions, and application services has received an unsolicited proposal to be acquired by Elliott Management Corporation.

A Possible Tie-Up

Compuware announced that its board of directors has received an unsolicited, conditional and non-binding proposal from Elliott Management. The hedge fund made a proposal to acquire all outstanding shares for $11.00 per share. In a reaction, Compuware's board says it will review the proposal before taking any action.

Shares in Compuware rose 12.9% in Monday's trading session, closing at $10.76 per share. Shares rallied another 6 cents on Tuesday, leaving another 1.7% potential return on the table if a deal would go through at $11 per share.

Valuation

Compuware ended the second quarter of its fiscal 2013 with $63.5 million in cash and equivalents. The company operates with $59.3 million in long term debt, for a net cash position of roughly $4.2 million.

For the first six months of its fiscal 2013, Compuware generated revenues of $446.8 million. The company net earned $21.1 million, or $0.10 per diluted share. Full year revenues could come in around $980-995 million, according to the company's full year outlook. Compuware expects to earn around $85 million for the full year, or between 36 and 40 cents per share.

Factoring in Tuesday's gains, the market values Compuware at $2.3 billion, close to the offer value. This values the firm at roughly 2.3 times annual revenues and roughly 27-28 times annual earnings.

Compuware does not pay a dividend.

Some Historical Perspective

Year to date, shares of Compuware have risen some 30%. Shares started the year around $8 per share and have traded in a $8-$10 trading range for the remainder of the year. News about the offer send shares to the highest level for the year.

Over the past decade shares of Compuware have traded in a wide $5-$15 trading range. The company has consolidated its annual revenues around $1 billion in recent years. Earnings fell from roughly $140 million in 2009 and 2010 to expected levels around $85 million for its fiscal 2013. Earnings per share kept up reasonably well after the company retired over 10% of its shares outstanding in recent years.

Investment Thesis

Elliot Management, the $20 billion hedge fund owned by Paul Singer makes a multi-billion bet by making an offer for Compuware. A possible deal would be remarkable given that most hedge funds do not often acquire entire companies, which is more the domain of private equity firms.

Jesse Cohn who is portfolio manager at Elliot commented on the proposal, "We believe in the quality of Compuware's assets-however, its execution, profitability and growth have meaningfully underperformed. As a result of Elliot's significant experience in the software sector and our deep public diligence into Compuware, we believe Elliot is uniquely situated to deliver maximum value to the company's stockholders."

Elliot already has boosted its stake in Compuware to 8% in recent weeks. The fact that Elliot was on the bid, might have contributed to the fact that shares rose almost 30% over the past month. This includes the 13% jump on Monday as the news about the proposal was made public. Despite the recent rally, the 15% premium offered by Elliot seems on the low side.

The offer values the firm still a dollar below the highs of 2011. I don't think that a majority of shareholders will tender at these levels. Yet the proposal is a net positive, and opportunistic investors could pick up some shares. Elliot might revise their offer upwards if enthusiasm to tender at these levels might be disappointing. If a new bid does not materialize, the pressure is on management to take value-creating steps in the short term.

Both plausible outcomes seem net positive for shareholders.

Source: Compuware - Proposal By Elliott Management Offers Chances For Opportunistic Investors