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The Deal: Compuware Told to Sell or Fight

NEW YORK (TheDeal) -- Starboard Value filed a letter to Compuware  (CPWR) calling for the company to either commit to a near term sale or prepare for a proxy fight.

Starboard said it holds shy of 5% of the software company (in June it reported a 4.2% holding), which has been under some pressure from its largest shareholder, Elliott Management Corp., since last December.

Activist Elliott offered $11 per share for the company at that time and, in response, Compuware announced a cost reduction plan, a spinoff of its cloud supply-chain management business Covisint and a 50 cent dividend. The Covisint initial public offering was completed and Compuware retains roughly 80% of the company, worth about $300 million.

Elliott entered a standstill in February, which it extended in July to Sept. 15. That standstill has since expired. In the interim, Elliott joined forces with an investor group led by Bain Capital and Golden Gate Capital and including Insight Venture Partners and GIC Special Investments Pte Ltd. in the buyout of IT software company BMC Software. Elliott, which held 9.6% of BMC, had previously agitated for a sale of the company and joined the PE group just prior to the shareholder vote for the buyout. That deal closed in September.

The potential sale of Compuware was considered on hold while the BMC buyout was in process and Elliott was under the standstill agreement. Some analysts have considered Compuware to be a complimentary and strategic fit for BMC.

A source familiar with the BMC buyout said that deal offers a lot of room for the PE group to create value from its asset base and that, while the Compuware add-on concept has logic, it is not a must-have for the BMC opportunity to pan out. But Compuware might be attractive at the right price, the source said.

Elliott declined to comment.

Compuware has put off the deadline for nominating directors to its board several times this year and it now expires Nov. 15. The company currently expects to hold its 2013 annual meeting in the first quarter of 2014. Its last annual meeting was held in August 2012.

Starboard, in its letter filed on a proxy statement form, outlined a series of improvements the fund thinks could be made to Compuware's current operating plans. The fund also said that a sale of the company now would carry much less operational risk and Compuware should define its intended course of action to provide clarity for its shareholders. Furthermore, Starboard said that if Compuware opts to remain a stand-alone company, its board composition needs further improvement. Two independent members were added to the board in April.

Starboard's position is that Compuware could cut costs further ($150 million rather than the proposed $80 to $100 million), shed non-core assets and implement a share-repurchase program of $450 million funded in part by the asset sales. Doing so would put Compuware's Ebitda margins in line with peers and allow an increase of the dividend to 60 cents based on decreased share count without increasing the aggregate payout, Starboard said.

Written by Scott Stuart

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