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Office Depot Inc (ODP), Compuware Corporation (CPWR), Integrated Device Technology Inc (IDTI): Is Starboard Value Right on These Three Companies?

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Office Depot Inc (NYSE:ODP)Starboard Value is a New York-based hedge fund that adopts a fundamental approach to invest in publicly traded companies. It invests in undervalued companies with small market cap. As a result of its investment strategy, assets under management surged to $1.1 billion in the first quarter of 2013, showing growth of 26% quarter over quarter.

Recently, Starboard bought around 15% stake in Office Depot Inc (NYSE:ODP) and invested in two technology companies, which are Compuware Corporation (NASDAQ:CPWR) and Integrated Device Technology Inc (NASDAQ:IDTI). Due to the recent investments of Starboard in these companies, I have analyzed these stocks to find investment opportunities for investors.

Divestiture of Mexican subsidiary

In February 2013, Office Depot Inc (NYSE:ODP) announced the merger with OfficeMax Inc (NYSE:OMX). Combined revenue of both companies was $18 billion in fiscal year 2012. This merger will bring cost synergies of around $500 million for Office Depot Inc (NYSE:ODP) by 2015. The merger of both companies will be completed in the current fiscal year. After this merger, combined assets of both the companies will be around $2 billion, out of which $1 billion will be in cash, while over $1 billion will be in revolving credit facilities.

Together, both companies will have 2,400 stores globally. Out of those stores, 25% loss-incurring stores will be shut as a part of the merger strategy. Operating costs of around $750 million will be saved by the closure of these stores. Taking this into consideration, the merger will be beneficial for Office Depot, as it will reduce costs significantly and will lead both Depot and Max to build a stronger entity. Also, cash generated from the merger will be reinvested in developing e-commerce and omni-channel retailing, which will boost future growth.

Office Depot Inc (NYSE:ODP)’s Mexican subsidiary contributed $32 million in profits in the first-quarter ending in March 2013. However, net annual loss of $100 million was posted in the same period of the previous year, which shows decline for the company. Office Depot is planning to sell its Mexican business, as it is not growing as per estimates. In the first quarter ending in March 2013, Grupo Gigante offered around $690 million to buy 50% stake in Office Depot Inc (NYSE:ODP)’s Mexican subsidiary. As per the regulations of the merger with OfficeMax, permission for the stake sale is required from OfficeMax Inc (NYSE:OMX). It is estimated that by selling the Mexican subsidiary, it will bring additional cash of $690 million and will halt further loss from this subsidiary.

The merger with OfficeMax Inc (NYSE:OMX) will reduce operational costs of Office Depot, and stake sale of the Mexican subsidiary will bring additional cash. Both these activities will bring $1.7 billion in cash for Office Depot Inc (NYSE:ODP) by the end of 2013 or early 2014.

Diluting stake in subsidiary and cost reduction plans

In May 2013, Compuware Corporation (NASDAQ:CPWR) filed documents for Initial Public Offer for its fully owned subsidiary, Covisint. Compuware will dilute 20% stake in Covisint for $100 million through IPO. Moreover, Compuware Corporation (NASDAQ:CPWR) will allot its remaining 80% stake in Covisint to the shareholders in fiscal year 2014.

Covisint offers cloud-based platform services, portal services, business to business data exchange, supply chain integration, and application development. It recently launched a new and enhanced supplier portal that will improve simplicity, usability, and mobile accessibility for its customers.

Covisint has 150 customers in automotive, health care, and energy verticals for its cloud engagement portals. These verticals contributed to 91% of the total revenue of the company. Covisint will further expand its platform offerings to financial services and public sector companies in 2014. By this expansion strategy, its revenue will surge 20% in the next fiscal year.

In the first quarter of 2013, Compuware Corporation (NASDAQ:CPWR) introduced a cost reduction strategy of around $80 million-$100 million in the coming two years. It has initiated this plan for fiscal year 2014 by estimated cost reduction of $40 million. This plan will boost the company’s profit in fiscal years 2014 and 2015. Divestiture of Covisint will also reduce additional costs of Compuware Corporation (NASDAQ:CPWR) by $60 million annually. By implementing its cost reduction plan, it will maintain its policy to give dividends of $0.50 per share to its shareholders.

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