Activist fund Engaged Capital may turn to a familiar strategy to boost…

Activist fund Engaged Capital may turn to a familiar strategy to boost...

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Firm: Quotient Know-how, Inc. (QUOT)

Activist: Engaged Capital

Percentage Ownership: 6.47%

Average Cost: $6.46

Activist Commentary: Engaged Capital was founded by Glenn W. Welling, a former principal and managing director at Relational Investors. Engaged is an experienced and successful small cap investor and makes investments with a two-to-five-year investment horizon. Its style is holding managements and boards accountable behind closed doors. Engaged has been an investor in Quotient since the end of 2020, taking profits when the stock has soared and buying more when it dropped back down.

What’s Happening?

On Nov. 17, 2021, Engaged despatched a letter to the board highlighting the corporate’s relative underperformance to friends, poor company governance practices and working points. Moreover, Engaged requested an exemption from the corporate’s lately introduced tax advantages preservation plan, which turns into exercisable if a shareholder acquires useful possession above 4.9%, to permit Engaged to amass useful possession as much as 9.99%.

Behind the Scenes:

That is an business that’s experiencing apparent secular tailwinds as coupons and promoting continues to shift from paper to digital and as e-commerce expands. These tailwinds have solely been magnified by the Covid surroundings. Nevertheless, the corporate has had constantly poor efficiency — in the latest quarter, the corporate minimize its steerage and reported dropping one in all its largest companions, Albertsons. Over the previous 4 years, the corporate has constantly missed assembly quarterly steerage. Consequently, over the previous 5 years, the corporate has underperformed friends by over 500%, is buying and selling near all-time lows and has underperformed the S&P 500 on 1-, 3-, and 5-year durations by -27.91%, -112.25% and -152.87%, respectively.

The issue with Quotient is just like many different activist targets: It’s a public firm nonetheless being run by its founder like a non-public firm with a bloated value construction and horrendous company governance. The plain indicators of poor company governance are all there – staggered board, mixed chairman/CEO, plurality voting in uncontested elections, and so forth. – all issues that almost all firms have completed away with years in the past. Nevertheless, the 2 extra blatant examples of an entrenched board are (i) the corporate instituting a 4.9% net-operating-loss poison tablet on the identical time that Engaged is shopping for its place – Quotient has at all times had important NOLs and has by no means had an NOL tablet, however all of the sudden feels the necessity for one instantly with no shareholder vote the identical time an activist reveals up; and (ii) changing a resigning director with a brand new director by placing the brand new director in a category that’s not up for election till 2024 and reducing the variety of administrators up for election this yr from three to 2. Good company governance would dictate that the brand new director is voted on as quickly as potential, significantly if it doesn’t imply altering the category. There isn’t any motive for this variation apart from to make it tougher for shareholders to materially change the composition of the board.

This unhealthy company governance isn’t just a tutorial challenge – it’s a sensible challenge for shareholders because it has led to a management challenge, a failed succession plan and horrible margins. Steve Boal is the founder, chairman/CEO of the corporate and has been since 1998. Boal stepped away as CEO in 2017 however remained chairman and took the reins again as CEO simply two years later, by no means actually giving his alternative, Mir Aamir, a good probability at success. Via all of this, the corporate is down about 53% from its 2014 IPO price and is guiding EBITDA margins of seven% to eight% versus 35%+ margins for comparable AdTech companies.

There are two choices right here to create shareholder worth: (i) herald a brand new administration crew with deep digital advert expertise to run the enterprise extra effectively for shareholders, or (ii) promote to a strategic investor with a administration crew that may higher handle this enterprise – it has been rumored that there was curiosity within the firm however administration has been unwilling to have interaction. Both one will not be a very good situation for Steve Boal.

The query is how do you accomplish both of these duties with an eight-person entrenched board with solely two administrators up for election this yr? Properly, there’s a method, and Engaged has completed it earlier than. Engaged confronted virtually the precise scenario in its 2017 activist marketing campaign at Lease-A-Middle – founder/chairman/CEO Mark Speese gave up the function as CEO in 2014, retained the function of chairman and took again the CEO function three years later in 2017. Engaged nominated a full slate of three administrators to the staggered board that very same yr, gained the proxy struggle and eliminated three incumbent administrators, together with chairman/CEO Mark Speese. Six months later, Speese resigned as CEO.

Curiously, of the 2 seats up for election at Quotient this yr, one in all them is chairman/CEO Steve Boal. Do you suppose Engaged will hesitate to observe the Lease-A-Middle playbook right here? The numbers communicate for themselves – over its 4½-year activist marketing campaign at Lease-A-Middle, Engaged made a 238.01% return versus 85.33% for the S&P 500 over the identical time interval. Having stated all of this, it goes with out saying that there isn’t any probability that the corporate grants Engaged an exemption to amass as much as 9.99% of the corporate’s widespread inventory. 

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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