The Deal: Covisint to Rally Support for IPO

TheStreet.com

NEW YORK (TheStreet) -- Covisint set out on a road show Thursday, Sept. 12, to discuss with potential investors its public offering, which parent Compuware hopes will raise at least $64 million.

Compuware's cloud software business said on Wednesday that it will offer 6.4 million shares of common stock within an expected range of $9 to $11 a share, raising between $57.6 million and $70.4 million. It has applied to be listed on the Nasdaq under the symbol COVS.

Proceeds will be used for general corporate purposes, to back growth and product development, and to fund capital expenditures and potential acquisitions.

News of an initial public offering emerged on Jan. 25, when Compuware announced it had rejected an unsolicited bid by activist investment firm Elliot Management.

"They believe it's an asset that's not being properly valued under Compuware," Susquehanna Financial Group LLP analyst Derrick Wood said of Covisint. Going public, he added, is "attractive to investors who can't really invest as part of Compuware."

At a midpoint price of $10 a share, Covisint will have a market capitalization of slightly more than $364 million.

Detroit-based Compuware, which presently owns all of the division, will remain a majority shareholder with 82.4% ownership following the IPO by virtue of owning a little more than 30 million shares.

With an enterprise value-to-revenue valuation of about 2.5, Covisint is priced at a discount, Wood explained, noting that other similarly sized cloud companies are trading at about 3.5 to 4 times.

"It's a niche market that hasn't really been formed yet, so there will definitely be a lot of education around who they compete against," he said, adding that the IPO price could increase slightly.

Covisint was founded in 2000 by various global automotive manufacturers looking to facilitate collaboration between suppliers and manufacturers. Though the cloud computing firm initially focused on the automotive industry, it has since widened its platform to include other sectors, such as healthcare.

Compuware, which acquired Covisint on Feb. 5, 2004, may be better-positioned for a transaction itself once it spins off the division, according to an industry source, who asked not to be named.

"Since Covisint's assets are so different, it may help better facilitate another transaction with that asset off the books," the source said.

Compuware hinted that it might field better offers after rejecting on Jan. 25 an $11 per share, or $2.3 billion, offer from Paul Singer's Elliot Management, noting that the bid undervalued the company.

The hedge fund remains under a standstill agreement with Compuware until Sunday, Sept. 15.

Compuware also announced in its Jan. 15 statement that it had enlisted Goldman Sachs & Co. and Allen & Co. as financial advisors, while retaining Skadden, Arps, Slate, Meagher and Flom LLP as legal counsel to assist with future developments.

Though it may not be clear where Elliot's bid presently stands, another potential acquirer for Compuware is BMC Software , according to the industry source.

"BMC makes a good strategic fit with Compuware," the source said. "The mainframe industry has been undergoing consolidation and I do think there's more consolidation that makes sense."

Not only do the two companies have minimal product overlap, but Elliot is also a 9% holder of both Compuware and BMC, the source added.

"There's certainly some interests aligned there to forge a combination of the two," the industry source said.

-- Written by Sarah Pringle in New York

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