The untold tale of Compuware, Karmanos and a bitter breakup

The untold tale of Compuware, Karmanos and a bitter breakup

July 28, 2015

Tom Walsh and JC Reindl, Detroit Free Press 10:19 a.m. EDT July 28, 2015

Cocktail hour was under way at the Atlantis Paradise Island resort in the Bahamas in the spring of 2013, and Compuware cofounder Peter Karmanos Jr. was spoiling for a fight.

Karmanos, then-70 and recently retired, was in the Bahamas as special honoree at a black-tie dinner to celebrate Compuware’s top-performing salespeople.

But Detroit’s brash corporate titan, sports team owner and philanthropist was fuming. He had just learned from his hand-picked successor, CEO Bob Paul, that board members wanted to pull the plug on paying $1.5 million for two retirement parties.

Related: Time line of the Compuware breakup

The more lavish of the events, planned in part by Karmanos’ wife, Danialle, was a formal gala for 400 invited guests from Michigan’s business and political elite. Elaborate invitations had been mailed to the governor and Compuware board members, among others, for what was billed as an “Esoteric Bacchanalia.” Attire was to be “gown & gloves, white jacket tuxedo.”

The plans — including renting out Detroit City Airport — shocked board members at a time of layoffs and pressure from activist investors to cut operational costs.

“We got to talk right now,” Karmanos told Paul at the resort, according to a transcript of testimony given by Paul as part of a lawsuit.

Paul said, “OK … let’s go into the banquet room because I know the way this is going. We’re going to freak everybody out.’ ”

Related: Cast of characters in the Compuware saga

The shouting match that followed became a pivotal moment in a three-year corporate drama that eventually led to the board’s decision to fire Karmanos later that year from his $600,000-per-year consultant job and cancel more than $4 million worth of stock options.

He was forced out by Paul and kicked out of his office in the 15-story headquarters tower he had built at Campus Martius.

With Karmanos out of the way, Compuware eventually was split into pieces last year, sold to an out-of-state private equity firm. And Compuware’s trophy headquarters in downtown — the Compuware Building — was sold last December for $142 million as part of the breakup.

Agitation from activist hedge fund investors during Karmanos’ final year with the company led to cost-cutting, hundreds of layoffs, the jettisoning of business units and, finally, the purchase of what remained by private equity firm Thoma Bravo of Chicago and San Francisco.

Another former Compuware subsidiary, cloud-computing firm Covisint, relocated to Southfield.

Related: How Compuware story came together

Once Michigan’s largest information technology (IT) company with 15,000 employees across the globe, Compuware now operates on one floor of its downtown building and has a few hundred employees.

All of those developments were still more than a year away that night in the Bahamas as Karmanos and Paul screamed and shouted, within earshot of the other guests.

“We went at it,” Paul recalled later. “There were a lot of expletives.”

The public record

Karmanos sued over his firing and was awarded $16.5 million in February by an arbitrator.

Details of the power struggles, boardroom drama, questionable tactics by hedge fund investors and even a blackmail allegation would have been sealed forever in secret documents if Compuware’s new private equity firm owner had accepted the arbitrator’s decision. When Compuware appealed the award in court, the secrecy that typically shrouds such arbitration cases was lifted.

What emerged from the records and interviews with major players is the story of a botched management transition from a proud dominant founder to a new CEO, and of a board of directors lurching from one firestorm to another under siege from activist hedge funds looking for Compuware to slash expenses and goose its stock price.

Mostly, perhaps, it’s the behind-the-scenes story of the last tumultuous years of an imposing corporate presence downtown.

40 years and out; Karmanos picks an exit date

This story begins in early 2011, when Karmanos, Detroit’s mercurial, big-hearted corporate icon, decided it was time to wind down his long Compuware career.

He vowed to retire two years later on the 40th anniversary of the company he cofounded with two friends in 1973 and led to become a large employer in the region and driver of downtown Detroit’s revival.

Compuware got its start in a converted Southfield motel and was founded as a services firm to help other companies master their new IT systems. Five years later, it began selling its own software products and enjoyed nearly 30% annual growth its first 25 years. In the mid-1990s, the company became Michigan’s fifth-largest exporter.

Compuware made Karmanos, the son of Greek immigrants, immensely wealthy. Rich enough to own an NHL hockey team, the Carolina Hurricanes; to donate more than $50 million to the Barbara Ann Karmanos Cancer Institute in memory of his late first wife; and to give $6 million with current wife, Danialle, to create the Karmanos Center for Natural Birth at Beaumont Hospital.

Compuware stayed profitable through most of his long tenure at the helm, but revenues and employment fell after the IT boom of the late 1990s and early 2000s, as Compuware’s traditional mainframe computer customer base became a smaller part of the IT world.

Compuware acquired new companies and introduced products in cloud computing and other niches to spur growth. One of those companies was Covisint, headed by Paul, whom Karmanos anointed as Compuware’s new CEO in 2011. Karmanos planned to stick around as executive board chairman until March 31, 2013, when he’d retire from active duty.

“I’d like to leave with a really great flourish at the end,” Karmanos told the Free Press in a Jan. 17, 2011, interview.

He had no idea how prophetic — in the worst of ways — that statement would prove to be. Karmanos did indeed leave Compuware in 2013, but in humiliating fashion.

Smooth start, then conflict

At first, the handoff of leadership to Paul and his executive team looked smooth. On June 20, 2011, Karmanos slipped into the role of executive chairman with an office down the hall from Paul.

“Now I can spend the next year and nine months mentoring those guys and helping them through some tough situations they might face,” Karmanos told the Free Press at the time.

But the company’s stock price was stuck in neutral — around $9 a share when Paul became CEO, then languished between $7 and $9 for the next year.

That December, new CEO Paul unveiled a three-year business plan to Wall Street investors designed to cut costs and focus on high-growth divisions while still tending to the company’s cash cow — software and services for the mainframe market.

Paul said his relations with Karmanos began to sour over cost-cutting in the ensuing months. “All of a sudden the relationship changed,” Paul testified during the arbitration this year.

Karmanos, for his part, said that when activist investors including Elliott and Sandell Asset Management soon emerged as buyers of Compuware stock, they were pushing the firm “to do stupid things,” such as paying the first-ever dividend since going public in 1992.

“The reason we didn’t pay dividends, even though I owned a ton of shares, was that it would have handicapped the company,” Karmanos said. “It was cash the company could not afford to pay out.”

Karmanos said he merely gave Paul advice — not orders — and sometimes helped Paul persuade board members to spend more money, not less, on strategic acquisitions of small tech companies.

“I never gave up on him,” Karmanos said of Paul. “I was fighting for him with the board when they wanted him to do things that were stupid, like cut too close to the bone.”

Paul, however, said Karmanos was strongly opposed to laying off employees or cutting projects in Detroit, where about 2,000 of the 4,500 remaining employees were based in 2012.

“That is part of Pete’s persona. He is about Detroit regardless,” Paul said. “As soon as we started to whittle away at that, we started impacting friends, we started impacting professionals that he had known for years, and he didn’t want anything to do with it.”

Paul favored selling the Compuware building, which had cost $450 million to build in the early 2000s. The building was ultimately sold for $142 million last December to Detroit businessman Dan Gilbert and Meridian Health.

Throughout the cost cutting, Paul said the executive team used “code terms so we didn’t freak all the employees out.” Instead of talking about layoffs or selling off units or the headquarters building, they would tell Wall Street about efforts to “rationalize the portfolio” or “optimize the balance sheet.”

Paul also wanted to cut costs related to another Karmanos passion: ice hockey. Under Karmanos’ direction, Compuware became a longtime financial supporter of an ice arena in suburban Detroit — the Compuware Arena — that Karmanos owned and where his Plymouth Whalers junior team played. Karmanos sold the Whalers early this year and they now play in Flint.

“For a global IT company, it didn’t make any sense,” Paul said. “We were writing $3 million to the NHL every year for a sponsorship of a couple hockey games in Europe.”

‘I think I just resigned’

By summer of 2012, relations between Karmanos and Paul were unraveling.

Paul tried to resign during a shouting match with Karmanos on Sept. 11 — but he never put his intentions in writing.

Former Detroit Mayor Dennis Archer, a 10-year Compuware board member at the time, recalled things this way:

“Mr. Paul indicated that he was inclined to resign due to disruptive, distracting and abusive behavior on the part of Mr. Karmanos,” Archer stated in an arbitration affidavit.

Paul said he threatened to resign Sept. 11 when Karmanos told him he should fire two top executives and Paul disagreed.

“It turned into an F.U., no, F.U. No, F.U. No, F.U.,” Paul testified at the arbitration hearings. “I wish that conversation had been more civil.”

Right after that clash, Compuware’s chief legal counsel, Dan Follis, received a phone call as he was leaving the office for a golf outing.

“I think I just resigned from the company,” Paul told him.

Follis, alarmed, asked Paul if he had put that in writing or told anyone else. Compuware would have to immediately report such news to the U.S. Securities and Exchange Commission.

Paul replied he hadn’t, and Follis said, “I think you should hold off, because it could be potentially damaging to the company to have a CEO resign without a succession plan in place.”

Karmanos gets his way, and more money

Paul agreed to stick around as CEO if board members agreed to prevent Karmanos, still technically Paul’s superior, from torpedoing business plans Paul and the board already promised to deliver.

He also insisted Karmanos move out of the Compuware headquarters, where he had an office on the same floor.

Paul got half what he wanted, but stayed anyway.

Karmanos agreed to fully retire by April 2013, but he would not give up his office. He also bargained a richer exit package — the post-retirement consulting contract — that would pay him $600,000 a year for six years. His previous package was a four-year deal worth around $300,000 annually.

Paul said board members apologized to him for allowing the awkward standoff with Karmanos to drag on so long.

“We’ve left Pete in this position too long. We’ve done you a disservice and we apologize,” Paul said he was told by board members, who decided Karmanos would not be involved in operations but keep the executive chairman title through March 31, 2013.

“OK, that’s fine,” Paul said he told the board, “but he needs to be moved out of this building, because it’s a disruption to me and the rest of the organization.”

The board waffled on that office relocation request, however, telling him, “We’re not sure we can do that, and blah, blah, blah,” Paul said later.

Karmanos stayed put.

“I think they kept him around because we’re paying him … a lot of money for six years,” Paul said. “They had to have him do something.”

On Oct. 29, Compuware filed an 8-K Report with the SEC that disclosed terms of the new exit package and said Gurminder Bedi, the lead independent board member, would become the next chairman after Karmanos left on March 31.

No news release was issued about the filing.

Nine days later, in a Free Press interview, Karmanos said he was cutting ties with the board so he could work on some technology ideas while having “an arm’s length relationship” with Compuware.

“I’m smart enough to know who I am,” Karmanos said, “and I’ll need to turn the Compuware part off, otherwise I’ll be a pest.”

As the holiday season approached in late 2012, an uneasy truce was in place at Compuware.

It would not last long.

Attack of the hedge fund

Compuware’s business, though profitable, had been shrinking for more than a decade as it relied heavily on mainframe software and services for the bulk of its revenues.

In fall 2012, Elliott Management, an activist investor in publicly traded companies it sees as underperforming or undervalued, went on a Compuware stock-buying spree, ultimately becoming the company’s biggest shareholder.

Owned by billionaire financier Paul Singer with more than $25 billion in assets under management, Elliott was also known for its high-profile legal battle with Argentina for full bond payments when the country defaulted in 2001. The hedge fund went as far as to detain an Argentine naval vessel.

On Dec. 17, 2012, Elliott made an unsolicited takeover bid of $11 per-share for all of Compuware, or $2.3 billion.

Paul received word of the surprise offer in a phone call from Jesse Cohn, the hedge fund’s portfolio manager.

“He said, ‘Bob, we’re putting in an offer for your company for $11. It’s going to hit the press in 30 seconds,'” Paul said during arbitration proceedings.

Activist investors like Elliott take stakes in companies they think need improvement and attempt to pressure their boards to make big changes, such as slashing costs, spinning off divisions, paying cash to shareholders or putting the company up for sale.

Compuware was a ripe target for activism. Revenues had fallen from more than $2 billion in 2000 to less than $1 billion, and Wall Street believed the company could easily boost profitability by cutting expenses, trimming its workforce and selling off divisions.

To help evaluate the buyout offer, Compuware hired Goldman Sachs, the New York investment bank.

Karmanos was no fan of either Goldman Sachs or activist investors like Elliott.

Activists, he said during arbitration, “generally don’t act in the best interests of the employees, the customers, the company or the other shareholders.” And Goldman Sachs, in Karmanos’ opinion, was more interested in extracting fees than the long-term interests of companies it advised.

According to Compuware’s lawyers, Karmanos acted “belligerent, openly caustic and blatantly disrespectful” during Goldman Sachs’ presentation to Compuware’s board on how to respond to Elliott’s offer.

Karmanos said he worried the structure of Goldman’s contract gave wrong financial incentives. “They made a lot of money if they had a proxy fight or if the company was sold,” he said. “And if none of those events happened, they made a (smaller) fee.”

Karmanos said he suggested staggering the election years of Compuware board seats. This classic anti-activist strategy would make it harder for Elliott to wage a proxy battle and gain control of the company by keeping more board seats out of reach.

Other Compuware board members were cool to that idea.

Personal information and intimidation

Goldman warned Compuware’s board that Elliott had many tools to get its way — even personal intimidation.

They soon experienced this firsthand.

In arbitration testimony, several Compuware board members recalled a meeting in New York with Elliott officials, soon after their unsolicited takeover bid, where Cohn showed up with large folders of what they believed to be personal information on individual board members.

One dossier was on board member Fritz Henderson (former General Motors CEO), another on Bedi, said Compuware board member Bill Grabe. “Their hope is the board member will say, ‘Jeez, life is too short. I don’t want to put up with all this stuff,” Grabe said in arbitration testimony. “So you’re dealing with somebody whose tactics it is to intimidate, to splinter, to do everything they can to be disruptive to the board the company.”

Paul testified to receiving a “veiled threat” from the hedge fund’s Cohn near the end of an ordinary phone conversation about Compuware’s business. Cohn remarked on a vintage Aston Martin sports car that Paul kept at home in his garage that few people knew about.

“He said, ‘By the way, love that English car you’re driving,’ ” Paul recalled. “How the hell would he know that, right?”

Offer rejected as too low

Asked for comment, an Elliott Management spokesman last week told the Free Press in a statement that “The conflicts of interest on the Compuware board were well reported and broadly documented. Despite these issues, Elliott was pleased to have worked with Compuware to reach a successful outcome for the company and for shareholders.”

In his arbitration testimony earlier this year, Henderson recalled the hedge fund’s concerns that Compuware’s board had too many long-tenured directors and some were too close to Karmanos. Elliott also said there weren’t enough directors with relevant skills and experience in the fast-changing software industry.

On Jan. 24, 2013, Compuware’s board rejected the Elliott’s buyout offer as too low.

Yet the rejection was not a full-throated rebuke to Elliott, which remained the company’s largest shareholder with just under 10% of the stock.

Too many Detroiters?

When it turned down the offer, Compuware also announced plans for the company’s first-ever dividend to shareholders and launched a cost-reduction program that quickly resulted in 160 layoffs.

Several weeks before his retirement, Karmanos fired back at Elliott’s criticism that Compuware’s board was parochial, with too many Detroiters and not enough technology experts.

“Having the former CEO of General Motors on your board is not a good thing?” Karmanos asked in a Free Press interview. “Having the woman who ran a university, those aren’t good enough credentials to be on our board? Having the former mayor of the City of Detroit, a former Michigan Supreme Court judge and head of the American Bar Association on your board is not a good thing? We’re doing all the right things, not all the wrong things, with the board.”

He was referring to Henderson of GM, Glenda Price of Marygrove College and former Detroit Mayor Dennis Archer.

A hedge fund, Karmanos said, “can come in, rip apart the pieces of it, and try to have a fire sale and maybe make 20% on their money, and they look like heroes.” And if that’s what happens to Compuware, he surmised, whatever’s left of the company probably would not be in Detroit.

Chaos in Paradise

That spring of 2013, as Compuware’s board was alternately appeasing and trying to fend off the takeover threats from Wall Street, plans were under way for festive events to mark Karmanos’ retirement and the company’s 40th anniversary.

One was the May 9 black-tie dinner at the Atlantis Paradise Island Resort in the Bahamas, as part of an annual trip for rewarding top Compuware sales performers.

Karmanos and his wife, Danialle, were on hand. Paul was, too, along with the sales stars and other Compuware executives, including Denise Starr, the chief administrative officer, and Lisa Elkin, head of marketing and investor relations.

Starr and Elkin had prepared a humorous, roast-like PowerPoint presentation for the dinner, sprinkled with made-up dialogue that had Karmanos sputtering snarky, profanity-laced comments about Sarbanes-Oxley Act rules for corporate boards and behavior.

Starr and Elkin also had been working for months with Danialle Karmanos on plans for two other celebrations to honor Peter — a formal gala June 8 at Detroit City Airport and an employee event outside the downtown headquarters, possibly at Campus Martius.

Initial plans called for Compuware to pay for events. Paul had approved a combined budget of $1.5 million a few months earlier, after more expensive ideas, such as hiring pop stars Sheryl Crow or Kid Rock to perform, were discarded.

As time went on, Paul — aware of potential criticism — proposed spreading the $1.5 million in expenses over two fiscal quarters.

Only a handful of people inside Compuware knew about the cost of the parties or that Paul had approved the budget — at a time when activist investors were pressuring the firm to cut costs and share more cash with shareholders.

That included most board members. That is, until they received their invitations in the mail for the VIP event.

Board members Henderson and G. Scott Romney, (brother of Mitt Romney), would later say that Paul erred in authorizing company funding for a gala at City Airport.

The invites arrived in foot-long black envelopes with white cursive lettering, announcing “the pleasure of your company is requested at an Esoteric Bacchanalia for Peter Karmanos, Jr.” The attire: “Gown & Gloves; White Jacket Tuxedo”

Alarm bells went off for Henderson and others: “My wife received the invitation and when she opened it, she said, “You’re never going to believe this,’ ” Henderson later recalled.

Henderson conferred with Compuware board chairman Bedi and another director. Bedi phoned Paul that morning in the Bahamas and said the company couldn’t be financing such extravagance when employees were being laid off.

Henderson, who headed GM during the automaker’s Chapter 11 bankruptcy and U.S. government control in 2009, immediately saw a potential problem in funding a pricey-looking party when Compuware was a takeover target, laying off workers, and drawing criticism from activist investors for spending too much money.

“I felt like it sent exactly the wrong message,” he said. “You almost couldn’t do anything worse if you’re in an activist campaign but to have an event like this which would undoubtedly be covered publicly.”

Board member Grabe, a former IBM executive, also was jarred by the party invitation, which he recalled was the size of a license plate.

“My reaction was, geez, it’s over the top,” Grabe said.

“If Compuware was going to pay for this thing, it was insane,” he added in arbitration testimony. “We’re firing people all over the place not because they can’t perform, but we can’t afford to keep them and make money.”

Karmanos, in a recent interview, recalled the board’s angst over the party this way: “As it turned out, it had nothing to do with the amount of money, it had everything to do with optics. That’s what they were worried about. And I said, ‘Go tell them to take their optics and stuff it.’ ”

Parties and layoffs

From the newly public arbitration records, it’s clear that Compuware officials tried to conceal the company’s role in funding the Karmanos retirement gala. An e-mail from a party vendor stated that she was told “it is imperative that no one knows that the gala is being paid for by the company.”

Denise Starr, a former Compuware executive involved with the party planning, conceded as much in her arbitration case deposition, saying, “Because of all of the things that the company was going through at the time with cost cutting and employees being laid off, if it were to be, you know, on the street that we can afford to be paying for contracts for food or whatever, it might not be perceived of properly.”

When asked if CEO Paul or her other superiors approved of “concealing the fact that the company was paying for the gala,” Starr replied, “Yeah.”

Most Compuware board members later swore under oath that they didn’t know Paul had sanctioned a $1.5-million budget for the retirement celebrations. As they found out, the decision was made to cancel the parties.

Paul sent an e-mail to Starr and Elkin, telling them to cancel the funding.

Starr informed the party vendor; while Paul broke the news to Karmanos in the Bahamas.

Then came another bombshell.

Karmanos a blackmailer? Or is Paul a liar?

In deposition testimony, Paul claimed that Karmanos, during their shouting match in the Bahamas, threatened to join Elliott’s hostile takeover bid against Compuware and advise them on which board members to replace if the party funding was not restored.

Karmanos had an upcoming meeting with the hedge fund’s billionaire owner, Paul Singer.

Karmanos himself emphatically denies making such a threat. He did travel on the Compuware jet to meet Singer in New York later on May 13, he said, but with different intentions.

Singer and Karamanos were substantial contributors to Mitt Romney’s unsuccessful 2012 presidential campaign. So Karmanos asked Compuware board member Scott Romney if his brother, Mitt, could arrange a meeting with Singer.

Karmanos soon found himself on Singer’s appointment calendar.

The reason for this trip, Karmanos said, was to defuse tensions between Elliott and Compuware.

Paul conceded he didn’t immediately sound an alarm or call an emergency board meeting about Karmanos’ threat. Instead, he said he waited until the next morning and told only Bedi, Compuware’s new chairman.

Paul testified that Karmanos put it this way: “It was just a matter-of-fact thing. ‘I’m going to New York’ — and this is screaming – ‘This is what I’m going to f’ing do to you.’ ”

Powell Miller, Karmanos’ lawyer in the later arbitration case, described the notion as ludicrous: “No sooner would Churchill join Hitler than Pete would join with Elliott and the activist hedge funds.” he said.

Karmanos had long taken a dim view of Wall Street hedge funds and analysts as short-term thinkers looking to make a quick buck. It was probably no coincidence that Compuware was targeted by activist investors around the time Karmanos, who would be a fierce opponent, declared his intention in 2011 to set a retirement date.

Karmanos, in his own arbitration case testimony, described his exchange about Elliott very differently.

He recalled saying to Paul, “What the hell is going on? Do these guys (the Compuware board members) want me to get involved in some proxy fight against them? Jesus, you know; it’s like they’re telling me I should do that. Are they trying to goad me into a proxy fight?”

Threat or no threat, the Karmanos-Singer meeting in the hedge fund billionaire’s office proved uneventful.

“I said … you know, ‘These guys (the Compuware leadership) are really working very hard, very hard, and it would be nice if you could give them some time and patience,'” Karmanos recalled telling Singer. “And Paul Singer says, ‘I think we can do that. In fact, I’m sure we can do that.’ ”

When Paul asked the next day how it went, he said Karmanos replied, “Well, I just told everybody to be patient” — and that’s pretty much how things played out. A standstill agreement, where Elliott promised to hold off on further bids for the company, was subsequently extended twice.

Paul later said he worried that Karmanos wasn’t telling him everything.

“You don’t go meet Paul Singer, right, multibillionaire Paul Singer, just to tell him to be patient,” Paul said. “So my antennas were up, trying to figure out whether we were about to engage in a holy war.”

The next explosion came just a day later — not from a Wall Street hedge fund, but an aggrieved spouse charging that Compuware had done her man wrong.

Angry e-mail sets off fireworks

Danialle Karmanos said she knew nothing of Compuware’s cancellation of funding for her husband’s retirement events she had helped plan until a vendor informed her May 13 in a preschool parking lot, where Karmanos was with her four young sons.

She got very angry.

Two days later, she sent a blistering e-mail to nine Compuware board members — and a few Detroit journalists.

“A particularly sinister and vile move,” she called Compuware’s withdrawal of funding for the fancy gala at City Airport. The invitations had already been sent to Gov. Snyder, Detroit’s then-mayor Dave Bing and a host of corporate CEOs and other VIPs.

She lashed out at CEO Paul and called him a “coward.”

“The community, employee and media perception is that Bob is threatened by Pete and sabotaged the events to recognize him as a leader,” she wrote.

Within hours, Danialle’s e-mail was front-page news. It was also the hot conversation topic at a dinner that night for Compuware directors and top officers.

Paul was “extremely upset” about the e-mail, said Laura Fournier, Compuware’s chief financial officer at the time, adding, “Bob is hanging his head and going, ‘I don’t know how I can ever go forward because Pete’s around.’ ”

Other board members commiserated that a founder CEO like Karmanos should not be allowed to stay in the headquarters building.

The next day, Paul for the first time put his allegation in writing to board members about Karmanos threatening to join Elliott in a proxy fight against Compuware. The e-mail was sent a few minutes before the board’s regularly scheduled meeting.

By then, Karmanos had already returned from New York.

Amid the friction between Peter Karmanos and Paul, and the furor over Danialle Karmanos’ now-public e-mail, the board issued Karmanos a written warning to behave and ordered him to vacate his office in the Compuware building.

Scott Romney, who had been on Compuware’s board since 1996, would later testify that the company’s handling of the aborted Karmanos retirement events was “certainly an embarrassing situation for the Karmanos family and for all of us, me included.”

Vacate the office

To this day, Karmanos insists that Compuware was wrong to cancel the retirement events.

“They would have accrued great benefit to the company. They would have helped transition all the relationships I had with different business leaders, politicians, journalists, over to Bob and the company. Those are valuable assets,” Karmanos said in a recent interview.

Karmanos said the parties had nothing to do with his own ego.

“I didn’t need a party to reintroduce myself to people,” he said, adding, “If I had one director that had a set of balls, it would have been nice of them to say, ‘You know what? I don’t give a damn what the optics look like, this is the guy that started the company, he’s been here for 40 years and is retiring and we have an obligation to have this kind of event.'”

A month after Karmanos was told to vacate his office at headquarters, Fournier was fired as chief financial officer. “Bob Paul asked me to leave because he didn’t think that I could handle the change that was coming up in the company,” she said.

At the arbitration hearing 20 months after her dismissal, Fournier reflected on the office tension during the time when Paul and Karmanos were at odds.

“Bob Paul is very insecure,” she said. “So that was why if I went to talk to Pete in any capacity, if I didn’t run back and make sure Bob knew why I went into Pete’s office, there would be backlash. Bob wanted to control the relationship with Pete. He was very insecure about it.”

So Karmanos was gone from the board of the company he founded, banished from his office in the Compuware headquarters he had built. But he was still on the company payroll, collecting a $600,000-a-year consulting fee.

And he just couldn’t resist one last rant.

A Goodfellows rant the last straw?

It came on Sept. 20, 2013, four months after Karmanos was tossed out of his office in the Compuware building.

Karmanos was guest of honor at the Old Newsboys’ Goodfellows Tribute Breakfast, where he received the Edward H. McNamara Goodfellow of the Year Award before an audience of several hundred business people.

After the breakfast, in response to a reporter’s question about Compuware, Karmanos said the company’s management “needs to get their head out of their ass, all right, and understand they have more responsibility than playing some kind of silly game with some jerks in New York City.”

If he were still in charge, he “would tell the hedge fund to go f— themselves.”

Compuware’s board and management, he added, were too focused on shareholders: “CEO means community, employees and then the owners.”

The comments, caught on tape, were reported and played by local media, including at Freep.com.

At the time, Compuware was still a tense place. The latest standstill agreement with Elliott had just expired and board members were bracing for a possible proxy fight for control of the company.

CEO Paul was outraged over Karmanos’ latest barbs.

He sent an angry e-mail to Bedi, the board chairman, and directors Grabe and Henderson, advocating cancellation of Karmanos’ consulting contract.

“I believe this is the last straw and could be considered disparagement,” Paul wrote, adding, “at some point the employees of this company need to see their new leader stand up to this buffoon.”

The Compuware board met Sept. 24 by telephone and, after 45 minutes of discussion, voted 9-1 to terminate Karmanos’ $600,000-a-year contract, based chiefly on his disparagement of the company and its management.

Dennis Archer, who was Detroit mayor when Karmanos decided to relocate Compuware from suburban Farmington Hills and build a new office tower downtown, was the lone dissenting vote.

Ralph Szygenda, a board member who had previously been GM’s chief information officer, asked if the board should explore giving Karmanos one more chance, a final warning, instead of terminating him. But no one aside from Archer bit on the idea, so Szygenda joined the majority vote to fire.

Lee Roberts, one of the new board members who joined in 2013, said in an affidavit, “Pete is an embarrassment to himself, the company he built, and to this board and executives.”

And Scott Romney, a longtime Karmanos friend, also voted to terminate his contract, saying “Pete has become a tragic figure. Time for Compuware to go forward and grow.”

Unknown to some board members, their vote to terminate Karmanos’ consulting contract also triggered the cancellation of $4.1 million worth of his vested options in company stock.

Two months later, Karmanos sued Compuware, claiming it acted illegally in canceling the consulting job and stock options.

Breakup and buyout by Thoma Bravo

Compuware’s final chapter as a publicly owned stock company came last September with the announcement that it would sell itself for $2.4 billion to private equity firm Thoma Bravo.

Paul said then that Compuware remained “firmly entrenched in Detroit,” as he sought to reassure Detroit-based employees and anyone concerned about the possible loss of a major corporate citizen.

When Thoma Bravo closed the deal in December, Paul bowed out with a $6.7-million golden parachute and about $13 million from his Compuware stock options.

The deal was hailed by Elliott Management, still Compuware’s largest shareholder, as investors voted overwhelmingly to approve the sale.

Elliott’s pressure had led to the replacement of six of Compuware’s 11 board members, all Detroiters, during 2013 and early 2014. Archer and Scott Romney were gone by the time of the sale, along with Karmanos, Szygenda, former Marygrove College President Price and former Covisint CFO Jim Prowse.

Worst fears realized

For Compuware founder Karmanos, many of his worst fears have been realized. The old Compuware has been splintered apart, with hundreds of jobs eliminated or moved from Detroit.

Once one of the region’s highest-profile public companies, Compuware today is no longer represented on the boards of either the Business Leaders for Michigan CEO group or the Detroit Regional Chamber.

“If Compuware had not come to Detroit, Quicken Loans might never come down — and look what’s happened since,” said Starr, a former Compuware executive who managed the headquarters move downtown in the early 2000s. She was hired last fall by Mayor Mike Duggan to be Detroit’s director of human resources.

“Pete was a visionary, a risk-taker, and I feel badly that he’s never been recognized for all he did for the city,” she said.

In an interview last week, Paul said the outcome for Compuware’s employees and shareholders would have been far worse if not for the steps he and his management team took to restructure, and ultimately sell, the company amid the intense pressure from activist investors.

“If we’d have left the business alone,” Paul said, “far more jobs would have been lost, investors would have come out very poorly — and Detroit would have suffered.” Compuware’s business “was back on a positive trajectory,” he said, and meeting or beating its profit targets for the last six quarters before the sale to Thoma Bravo.

Carving up the company

In 2012, when Elliott first bid to buy Compuware, the company had more than 4,500 employees, about 2,000 in Detroit.

By February 2014, after selling three business units in a sale to Los Angeles private equity firm Marlin Equity Partners, Compuware was down to 3,200 employees with 1,200 in Detroit.

One of those businesses was turned into a standalone firm called Lochbridge, which moved more than 200 workers out of Compuware headquarters to another Detroit building. Also departing was Covisint, that cloud-computing firm Compuware bought in 2004 and which went public in 2013. Covisint moved to Southfield last year and employs 217 workers there.

What remained was split into two main pieces by Thoma Bravo. A growing “application performance management” (APM) group called Dynatrace is based in Massachusetts, but still has a portion of its workforce in Detroit.

The mainframe business kept the Compuware name and remains headquartered in Detroit, occupying the fourth floor of the Compuware building.

Chris O’Malley, CEO of today’s Compuware, said it has increased both its order bookings and head count since the Thoma Bravo purchase but wouldn’t reveal specific numbers.

“All the promises we made — we’re going to hire, we’re going to stay in Detroit — we’ve kept,” he said, adding, “I’ve never met Mr. Karmanos, but I think if he could actually see what the mainframe business is doing, he’d be proud of it. And Bob Paul would, too.”

A smaller Detroit presence

Legal wrangling between Karmanos and Compuware could drag on for years. Compuware paid the $16.5-million arbitration award to Karmanos in June but apparently is poised to continue its appeal.

Karmanos, after winning a litigation round in court this past spring, said it’s not so much about the money — although he does plan to keep it.

Meanwhile, Compuware has a much smaller philanthropic and civic presence under its new private equity owner, but it hasn’t given up all its commitments to Detroit.

Karmanos was an early proponent of the M-1 Rail streetcar line under construction on Woodward Avenue, along with Quicken founder Dan Gilbert and auto racing mogul Roger Penske.

For donations of $3 million or more, the Detroit Three automakers, DTE Energy and other companies got naming rights to stops along the streetcar line. But Compuware, in austerity mode at the time, couldn’t go that high.

One of Paul’s final acts as Compuware CEO was to sign off on a $1.5-million pledge over 10 years to M-1 Rail, which Thoma Bravo knew about. So Compuware and J.P. Morgan Chase, another $1.5-million donor, will split the naming rights to the Canfield stop, each taking a different side of Woodward.

By coincidence, that $1.5 million of corporate money for M-1 Rail was the same amount that Paul once approved — and later withdrew — for the Peter Karmanos Jr. retirement parties.

Original Article

 

Leave a Reply

Your email address will not be published. Required fields are marked *