Compuware Taken Private — Implications

On September 2, 2014, Compuware announced that it has agreed to become acquired by private equity firm Thoma Bravo for approximately $2.5 billion. This casts into sharp relief the fate of the old and new players in the application performance management (APM) market and gives Compuware a choice of which to be.

Recent History of the APM Business

In 2005, CA acquired Wily Technologies, effectively ending the startup phase of the first round of the APM market. IBM, Quest, CA, and HP had all acquired startups that managed J2EE applications in production. With CA’s acquisition of Wily, it was generally assumed that the battle for supremacy in APM would now be waged between large established vendors.

That same year in Linz, Austria, Bernd Greifeneder founded dynaTrace, completely ignoring the fact that that the major vendors of systems management software had each acquired a company to manage the performance of Java applications in production. dynaTrace had the unique capability to trace transactions from their inception in web servers through entire application systems. As distributed and service-oriented architectures became prevalent, this became a critical capability, and dynaTrace started taking business away from the big four in the systems management business.

Compuware acquired dynaTrace in 2011 for $256M, adding it to its existing APM portfolio, which consisted of the assets from its previous Gomez and Adlex acquisitions. These acquisitions made Compuware a strong player in the APM market. To its credit, Compuware did not just sit on its acquired assets; it invested heavily in new capabilities, particularly in the mobile arena.

In 2008, former Wily CEO Lew Cirne founded New Relic. New Relic broke all of the traditional rules in APM. It supported a language no one else did, Ruby. It was (and still is) only offered on a SaaS basis. It went to market primarily through partnerships with cloud vendors, allowing it to add customers at a very rapid clip. It focused on making its product simple to install and easy to use, and it tried to avoid the need for expensive, vendor-provided professional services. Over the years, it added support for Java, .NET, PHP, Python, and Node.js. More than 50,000 organizations now use New Relic’s product—that’s more than the rest of the industry combined. New Relic has raised six rounds of funding, with the last valuing the company at over $1B. It has become the leader in managing applications deployed in public clouds.

Also in 2008, Jyoti Bansal, Wily’s former VP of development, founded AppDynamics. AppDynamics focused on tracing transactions through modern distributed stacks and on doing so as automatically as possible. The company was able to combine most of New Relic’s ease of adoption with dynaTrace’s valuable transaction tracing into a powerful and easy-to-deploy APM solution. Over time, AppDynamics supported a wide range of languages as well, including Java, .NET. Python, and Node.js. AppDynamics became the leader in managing applications deployed across mixtures of on-premises, private, hybrid, and public cloud environments—and it tended to focus much more on larger enterprise customers than did New Relic. The most recent round of financing done by AppDynamics also valued the company at more than $1B.

Private venture–funded companies do not disclose their revenues, but we have to assume that that investors in both New Relic and AppDynamics are rational and that this rapid rise in valuation to over $1B for each company was supported and justified by rapid growth in revenues.

The Compuware Story

As described above, the APM division of Compuware assembled and built a formidable set of application performance management assets. The solution was truly enterprise grade, with support for tracing transactions from their inception in browsers and mobile devices all of the way back to the mainframe (if there was one). The only thing that plagued Compuware was that it was just not as easy to get dynaTrace into production as it was with either New Relic or AppDynamics.

Whether due to the ease with which the products could be deployed into production or something else, the rapid rise in valuation for New Relic and AppDynamics and the financial results for Compuware’s APM division (shown below) make it clear that business for Compuware has not recently experienced the same rate of growth as has business for New Relic and AppDynamics. In particular, Compuware’s APM revenues were $74M a year ago and rose to $85M by the end of 2013, but were back down to $77M for the most recent reported quarter.

Recent Compuware APM Revenues (Source: Compuware financial statements)

    • APM Revenues for Quarter Ending June 30, 2014: $77M
    • APM Revenues for Quarter Ending March 31, 2014: $84M
    • APM Revenues for Quarter Ending December 31, 2013: $95M
    • APM Revenues for Quarter Ending September 30, 2013: $75M
    • APM Revenues for Quarter Ending June 30, 2013: $74M

Now, the other side of the Compuware story is that Compuware has a legacy business in the area of mainframe systems management. In the most recent quarter, that business generated $66M in revenue, but $60M of it was maintenance, which suggests that this business is not growing at all and may be slowly declining over time.

Thus, Compuware essentially consists of two businesses: the mainframe business, which probably cannot be made to grow, and the APM business, which certainly has the product assets to be a high-growth APM vendor like AppDynamics and New Relic, but which has not shown any such high growth recently.

The Future of Compuware

In general, companies go private in order to take actions that the stockholders of a public company would not, at least in the short term, tolerate. Those actions might include dramatic cost cutting and layoffs, closing of offices, selling off of various businesses, or investing so heavily in new product development and market development that profits are eliminated, at least in the short term (this would cause the stock price to tank and the stockholders to consider replacing the management team). The things we know for sure are that the people at Thoma Bravo who spent $2.5B for Compuware are not stupid and that they intend to make money off of their acquisition. Here are some probable scenarios:

    • The mainframe business gets spun out and sold to IBM, BMC, or CA, all of which are also in the mainframe systems management business. Note that BMC was taken private last year, presumably to allow it to address a similar set of issues.
    • Thoma Bravo already owns Keynote, a synthetic transaction and passive end user experience monitoring solution. Combining Keynote with the Gomez assets of Compuware is only logical.

What about the future of the APM business? Several dynamics and possibilities are at work:

    • The new APM market, which is dominated by New Relic and AppDynamics, is experiencing extremely rapid growth. This growth is being driven by Agile Development (which creates more applications more quickly) and by deployment across highly distributed and dynamic environments.
    • Compuware has been mostly stuck in the low-growth segment of the market with legacy APM vendors like IBM, HP, BMC, and CA, none of which participate in the new high-growth market to any meaningful degree.
    • If Compuware can take advantage of being private to make the investments needed to fully participate in the new high-growth segments of the APM market, then dynaTrace + Gomez could become a very valuable high-growth APM company.
    • However, if Compuware is not allowed to make the investments needed to participate in the new APM markets, then its APM business will continue to languish as it has done recently, and the APM business is likely to be merged with the APM business of legacy vendors like IBM, HP, BMC, and CA.
    • Update. Compuware has just announced that the APM division of Compuware will now operate under the name of dynatrace. This positions Compuware to be able to spin dynatrace out as its own company should it decide to do so.


Like BMC before it, Compuware has been taken private. This is likely because neither the old mainframe business nor the new APM business has shown any growth. Being private will create an opportunity for its APM division to reinvent itself and fully participate in the new high-growth APM markets. We can only hope that the new owners of Compuware will give the APM division the opportunity to join the new leaders in APM.

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