Activist fund Engaged Capital may turn to a familiar strategy to boost performance at Quotient
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Firm: Quotient Know-how, Inc. (QUOT)
Enterprise: Quotient Technology operates as a digital media and promotions know-how firm that provides energy built-in digital media and promotions packages for manufacturers and retailers. The corporate operates by two segments: (i) Promotions phase, which presents digital coupons and (ii) Digital Media phase, which offers focused advertisements to prospects. The corporate has constructed a few of the most precious buyer buying knowledge insights with trade main know-how, permitting it to successfully work with over 800 Shopper Packaged Items (CPG) firms and plenty of prime retailers.
Inventory Market Worth: $689.2M ($7.30 per share)
Activist: Engaged Capital
Proportion Possession: 6.47%
Common Price: $6.46
Activist Commentary: Engaged Capital was based by Glenn W. Welling, a former principal and managing director at Relational Traders. Engaged is an skilled and profitable small cap investor and makes investments with a two-to-five-year funding horizon. Its model is holding managements and boards accountable behind closed doorways. Engaged has been an investor in Quotient for the reason that finish of 2020, taking earnings when the inventory has soared and shopping for extra when it dropped again down.
What’s Taking place?
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 helpful possession above 4.9%, to permit Engaged to amass helpful possession as much as 9.99%.
Behind the Scenes:
That is an trade 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 setting. Nevertheless, the corporate has had persistently poor efficiency — in the newest quarter, the corporate lower its steering and reported dropping one in all its largest companions, Albertsons. Over the previous 4 years, the corporate has persistently missed assembly quarterly steering. 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 much like many different activist targets: It’s a public firm nonetheless being run by its founder like a personal 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 many others. – all issues that almost all firms have finished 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 capsule 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 capsule, however immediately 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 isn’t up for election till 2024 and reducing the variety of administrators up for election this 12 months from three to 2. Good company governance would dictate that the brand new director is voted on as quickly as doable, significantly if it doesn’t imply altering the category. There isn’t a motive for this variation apart from to make it more durable for shareholders to materially change the composition of the board.
This dangerous company governance isn’t just an instructional 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 substitute, Mir Aamir, a good probability at success. By means of 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 related AdTech companies.
There are two choices right here to create shareholder worth: (i) usher in a brand new administration staff with deep digital advert expertise to run the enterprise extra effectively for shareholders, or (ii) promote to a strategic investor with a administration staff that may higher handle this enterprise – it has been rumored that there was curiosity within the firm however administration has been unwilling to interact. Both one isn’t a great state of affairs 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 12 months? Properly, there’s a means, and Engaged has finished it earlier than. Engaged confronted virtually the precise state of affairs in its 2017 activist marketing campaign at Lease-A-Middle – founder/chairman/CEO Mark Speese gave up the position as CEO in 2014, retained the position of chairman and took again the CEO position three years later in 2017. Engaged nominated a full slate of three administrators to the staggered board that very same 12 months, received the proxy struggle and eliminated three incumbent administrators, together with chairman/CEO Mark Speese. Six months later, Speese resigned as CEO.
Apparently, of the 2 seats up for election at Quotient this 12 months, one in all them is chairman/CEO Steve Boal. Do you assume 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 mentioned all of this, it goes with out saying that there is no such thing as a probability that the corporate grants Engaged an exemption to amass as much as 9.99% of the corporate’s frequent 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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