Out with the old and in with the new at Compuware

Contact: Brenon Daly

Deal flow at Compuware so far this year has been out with the old and in with the new. The 36-year-old company sold off its testing automation and software quality business to MicroFocus for $80m earlier this year, and then last week, it put some of those proceeds toward covering its $295m purchase of Gomez. (Interestingly, Updata Advisors worked both the divestiture and acquisition for Compuware.)

The purchase of Gomez significantly bolsters Compuware’s application performance management (APM) business. It also dramatically changes the face that Compuware shows to Wall Street. Most investors know Compuware – if they know it at all – as ‘a mainframe company.’ (Indeed, roughly two-thirds of the firm’s product revenue comes from its mainframe business.) Even in a robust IT spending environment, the mainframe business is a slow-growing one.

While only a small slice of overall revenue, Gomez brings a predictable base of subscription revenue that’s been growing at a pretty good clip recently. In the first two quarters of 2009, Gomez increased revenue 25%. Granted, Compuware paid for that growth, valuing Gomez roughly four times as richly as Wall Street currently values Compuware itself. But the fact that Compuware shares actually ticked higher when the vendor announced the acquisition indicates that the deal has some support. (In contrast to, say, Wall Street’s punishment of Xerox shares on that company’s plan to pick up ACS.)

And Compuware is essentially paying the prevailing market valuation (5.5x trailing sales) for an on-demand company in its reach for Gomez. Undeniably, the firm could have found any number of targets available at a sharp discount if it wanted to consolidate a bunch of mainframe software providers. After all, Compuware has some experience with M&A, having inked nearly 40 deals since it went public in 1992. However, we would argue that few of those transactions have been as forward-looking as the addition of Gomez.