Is Elliott’s Offer to Compuware An Arbitrage Opportunity?

Elliott Management, a large hedge fund founded by Paul Singer in 1977, made an offer to purchase Compuware Corporation (NASDAQ:CPWR) for $11 per share on December 17^th. Elliott had reported owning 5.7 million shares of the software and services company at the beginning of October (see Elliott’s stock picks). In its offer, Elliott noted that Compuware’s stock had significantly underperformed the market for the previous two years and claimed that it could better use its assets to deliver shareholder value. The stock currently trades at about $10.80; if it took six months from the current date for a deal to close, buying at that price would yield an annualized unlevered return of 3.7%. Hedge funds like to invest in merger arbitrage- that is, when they expect the deal to close- because the returns tend to be uncorrelated with the market (read more about merger arbitrage strategies).

In this case there’s also the possibility, raised by some analysts, that Elliott’s proposal will kindle more offers for Compuware, including by strategics. Strategic acquirers tend to offer better prices, since they already have a management team in the industry and tend to believe more strongly in the benefits of synergies. Compuware Corporation is reviewing Elliott’s offer, and it’s fair to imagine that one reason is to discuss the prospect of better deals with sell-side bankers- as well as to give other buyers the opportunity to make their own offers. Obviously, if the company sells at a higher price than $11, investors would earn a much higher return than from standard merger arbitrage.

Billionaire Steve Cohen’s SAC Capital Advisors had reported a position of 4.5 million shares in Compuware Corporation in its 13F filing for the third quarter of the year (check out Cohen’s stock picks). D.E. Shaw, a large hedge fund founded by billionaire David Shaw, was another significant investor in the company (find D.E. Shaw’s favorite stocks). MAK Capital One and Osterweis Capital Management were two more hedge funds owning the stock.