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Compuware Corporation (CPWR), BMC Software, Inc. (BMC): This Spinoff May Breathe New Life into the Data Storage Industry

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Detroit-based application software firm Compuware Corporation (NASDAQ:CPWR) has drawn new-found attention with its announcement that it would spin off its data storage and management subsidiary as a separate company. Known as Covisint, the subsidiary would trade on the Nasdaq Exchange under the ticker symbol “COVS.” Although details about the IPO remain sketchy, Compuware Corporation (NASDAQ:CPWR) has stated publicly that it hopes to raise at least $100 million through this transaction.

Compuware Corporation (NASDAQ:CPWR)

Although Compuware Corporation (NASDAQ:CPWR) is not known as a particularly sexy technology company, it does enjoy favor from certain quarters of the market. The company’s decision to spin off one of its subsidiaries suggests that it wishes to unlock some value in its core businesses in order to compete with its larger rivals. It should be noted that Compuware Corporation (NASDAQ:CPWR) recently made news for rejecting a takeover bid from an asset management firm. Investors who wish to take a closer look at Compuware and Covisint should begin by looking at their closest competitors.

Compuware vs. the Competition

Compuware directly competes with Islandia, New York-based CA, Inc. (NASDAQ:CA) Technologies  and Houston-based BMC Software, Inc. (NASDAQ:BMC) . Although all three companies have similar operational structures, CA, Inc. (NASDAQ:CA) has the largest employee head count at over 13,500. For comparison, BMC Software, Inc. (NASDAQ:BMC) and Compuware both have fewer than 7,000 employees.

It should be no surprise that CA, Inc. (NASDAQ:CA) Technologies has the largest market capitalization of the three firms. At $12.5 billion, this figure doubles BMC Software, Inc. (NASDAQ:BMC)’s market capitalization metric and beats Compuware Corporation (NASDAQ:CPWR)’s figure by a factor of six. CA, Inc. (NASDAQ:CA) is also the most profitable of these firms: its profit margin of over 20 percent comes on the strength of $944 million in after-tax earnings and over $4.6 billion in gross 2012 revenues. By comparison, BMC Software, Inc. (NASDAQ:BMC) earned $331 million on $2.2 billion for a margin of 15 percent. Compuware reported earnings of $73.5 million on total revenues of about $970 million.

Although all of these firms have relatively healthy balance sheets, Compuware Corporation (NASDAQ:CPWR) has the greatest potential for trouble. Its debt load of $70 million narrowly exceeds its cash hoard of about $65 million, and its levered free cash flow sits at under $100 million. BMC Software, Inc. (NASDAQ:BMC) and CA, Inc. (NASDAQ:CA) both have more cash than debt and enjoy robust cash flows.

How the Deal Is Structured

Although the precise structure of the Covisint spin-off has not been made public, Compuware is likely to raise about $100 million in the transaction. The precise fraction of Covisint that will be distributed to shareholders remains unclear.

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