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.

The dual-track is back

Contact: Brenon Daly

Derailed by the bear market for much of the past two years, the ‘dual-track’ is back. Witness Wednesday’s purchase of Gomez by Compuware. The application performance management vendor got snapped up for $295m after being on file to go public for some 17 months. But as this trade sale indicates, the dual-track is no longer necessarily a path to riches. In fact, Gomez sold for about half the multiple that other dual-track companies garnered in recent deals.

That’s by no means a knock on Gomez, which got a relatively handsome valuation of 5.5 times trailing revenue in its sale to Compuware. Instead, it’s simply a reflection of how much the equity markets have come down. Keep in mind that a buyer looking to take out a company that’s already filed for an IPO effectively has to outbid the public market. Obviously, the lower the indexes, the less an acquirer has to bid; the opposite is also true.

Back when the markets were buoyant, dual-tracking companies could pull off a double-digit multiple if they opted to sell. For instance, EqualLogic sold to Dell in November 2007 for 12x trailing sales, just three months after filing its IPO paperwork. (We would note that the timing of EqualLogic’s sale for $1.4bn in cash was impeccable. The Nasdaq promptly went on a nearly uninterrupted slide for the next 18 months that cut the index in half.) And even when the market was dropping, mobile software provider Danger Inc still got picked up by Microsoft for nearly 9x trailing sales. Danger filed its prospectus in mid-December 2007, just two months before Microsoft snagged the company.

Of course, both of those previous dual-track deals were inked when the Nasdaq was higher than it currently is. And if we compare the valuation that Gomez got with other publicly traded SaaS companies, 5.5x trailing sales for an unprofitable, relatively small on-demand company starts to look pretty enticing. Add to that instant liquidity in the form of cash, rather than locked-up shares, and that’s a bid that most backers would hit every time.

Trans-Atlantic transactions take off

Contact: Brenon Daly

It was a big and busy day on Wednesday for British companies shopping in the country’s former colony across the Atlantic. Collectively, the three deals boosted the total disclosed value of acquisitions by UK-based firms so far this year by nearly 20%. For starters, LSE-traded software vendor Micro Focus picked up one full Nasdaq-listed company and bits of another US public company, spending a total of about $155m. Taken together, the simultaneously announced deals are the second-largest transaction announced in 2009 by a UK-based buyer. Adding to that, British defense giant QinetiQ reached for a well-funded security startup in a deal that features a handsome valuation and a pretty rich possible earn out.

In the more significant purchase, Micro Focus picked up long-ailing Borland Software for $1 per share, or an equity value of about $75m. In the same breath, it also scored a business line from Compuware for $80m. Micro Focus says the addition of Compuware’s application testing/automated software quality (ASQ) unit will help bolster its existing ASQ offering, a suite of tools that it sells under the Data Express name.

One of the more interesting aspects of Micro Focus’ double-up deal is that the company tapped Arma Partners to run both processes. (The transaction was headed up by Arma’s Paul-Noël Guély, along with Keith Robinson, Varun Sunderraman and Graham Smith.) Arma has served as a kind of house bank for Micro Focus, advising on four of the company’s past five deals. On the other side of the table, Updata Advisors worked with Compuware on its divestiture and JP Morgan Securities advised Borland. We’ll have a full report on the moves by Micro Focus in Thursday’s 451 Group sendout.

In a separate transaction, QinetiQ (through its North American arm) moved deeper into the cyber-intelligence world by buying Cyveillance. Terms call for QinetiQ to hand over $40m upfront, along with a possible $40m earn out over the next two years. Cyveillance, which we understand didn’t use a banker, generated sales of about $10m in 2008. Look for a full report on the relatively richly valued transaction in tonight’s 451 Group MIS email.