Detroit-based Compuware finalizes latest buyout, gets new name

Detroit-based Compuware, once the largest tech company in Michigan, has passed from the hands of one private-equity firm into another through a debt-heavy leveraged buyout.

Whether the new Texas-based owner plans any major changes to the company or intends to keep all operations and employees in Detroit are open questions.

The deal between Compuware's current owner, private-equity firm Thoma Bravo, and one of its longtime competitors, Houston-based BMC Software, a company backed by New York private-equity firm KKR & Co., survived the financial turmoils of the coronavirus pandemic and was finalized Monday.

Under the deal, first announced March 2, Compuware is getting a new name: Compuware, a BMC company.

Compuware CEO Chris O'Malley said in a phone interview that he is staying on as chief executive. And at least for the short term there are no plans for any employee layoffs or relocations, he said.

"In the immediate term, nothing is going to change," O'Malley said. "The BMC folks are doing this in a very thoughtful way. They’re going to take their time to best understand all of the things that we’ve created.”

 The parties in the deal are not revealing the sale price.

A news report in May said BMC would sell $1.25 billion in high-yield "junk" bonds to help finance its buyout of Compuware. The deal will leave BMC with "very high leverage," according to Moody's Investors Services, which recently gave BMC a "B3" credit rating that is considered below investment grade and signals "high credit risk."

Private-equity deals that involve high debt loads can sometimes lead to future troubles for an acquired company because the debt leaves little room to maneuver or recover if revenues falter.

Representatives for BMC and KKR declined comment for this report. O'Malley declined to discuss any financial details of the transaction.

O'Malley said there is minimal overlap between the Compuware and BMC workforces, and the companies are largely complementary to each other.

“The two of us together can create an innovation force in the market," he said.

“BMC is bigger than us in the mainframe market, and they’re also considered the innovator in the mainframe market in a different space. We are basically complementary," he said. "BMC saw in us a path to create collective growth, and create new technologies and new innovations that they need to compete."

The Karmanos years 

Compuware is a mainframe software company started in 1973. For decades, Compuware was closely associated with its cofounder, metro Detroit businessman Peter Karmanos Jr..

Revenue and worldwide employee headcount peaked in 2000 at $2.2 billion and 15,356, respectively. Karmanos moved the company from Farmington Hills into a newly constructed Detroit headquarters in 2003 near Campus Martius.

Compuware was the first major business to relocate from the suburbs to downtown Detroit in the 2000s, preceding the later arrival of Quicken Loans.

Karmanos has had no involvement with Compuware since about a year before Thoma Bravo bought Compuware in December 2014. That $2.4-billion buyout took the publicly traded company private.

The sale was the result of Compuware shareholder activism instigated by Elliott Management, a New York hedge fund belonging to billionaire Paul Singer.

Elliott Management played the same role in a 2013 deal that took BMC private through a $6.9-billion sale to private-equity firms Golden Gate Capital and Bain Capital. The two firms went on to sell BMC to KKR in a 2018 deal reportedly valued at $8.5 million. 

Improved profitability

O'Malley, whom Thoma Bravo brought in from Chicago to lead Compuware, said the company has experienced a dramatic improvement in profitability since the 2014 sale as well as success in recruiting a younger generation of employees.

Although Compuware was profitable at the time of the sale, according to O'Malley, its long-term prospects did not look good.

 "We were in a bad place five-and-a-half, six years ago," O'Malley said. "There’s not a person on Earth, other than maybe me, who five-and-a-half years ago thought Compuware could grow. 

"McKinsey and Bain consulting thought that Compuware was terminal five-and-a-half years ago. When they would tell private-equity firms about the future chances of this company, they would just shake their heads.”

O'Malley declined to share Compuware's annual revenue, but said revenues have grown in each of the past three years. This was "organic" growth, he said, not simply added revenue from Compuware's string of acquisitions of smaller tech companies.

”So the base core company is growing, and it’s not just growing revenue — it’s growing profitability every year," he said. "In five-and-a-half years, we (only) had two bad quarters.”

O'Malley also declined to give the number of Compuware employees. Compuware reported about 1,200 employees in Detroit in early 2014, although that number was believed to be lower at the time of the sale to Thoma Bravo late that year and O'Malley's arrival.

“I will say there’s more people working at Compuware today than at any point that I’ve been here," O'Malley said. “We continue to recruit.”

Compuware is still headquartered in the architecturally distinct 15-story building that the company, under Karmanos' direction, constructed in 2003 at a cost of $450 million.

However, Compuware now rents space after selling the building for $142 million in late 2014 to Meridian Health and Detroit businessman Dan Gilbert's real estate firm. The common name for the building also changed to One Campus Martius, no longer "the Compuware Building."

"We just signed a new lease, so we’re going to be there a long time," O'Malley said.

Far from obsolete

The mainframe software business has traditionally enjoyed high profit margins, although it was once thought to have limited growth potential amid the growth in cloud computing.

Yet mainframe technology has evolved and industries such as finance, airlines and credit cards often use mainframes in tandem with cloud-computing platforms because of mainframes' security benefits and high dependability, among other reasons, according to Jason Bloomberg, president of Intellyx, an IT analyst firm in Suffolk, Virginia.

So there is demand for new mainframe software and tools — not just tweaks to old software.

"Now the mainframe is really a fully modern, cloud-centric platform," Bloomberg said. “I remember back in the mid-2000s, you talked to mainframe vendors and they were sort of embarrassed that they were still working in this space because everybody sort of thought that the platform was on its way out and was obsolete and was all legacy."

ContactJC Reindl: 313-222-6631 or jcreindl@freepress.com. Follow him on Twitter @jcreindl. Read more on business and sign up for our business newsletter.