On Feb. 25, Starboard sent a letter to the company nominating the following four director candidates for election to the company’s board at the 2022 annual meeting: (i) Peter A. Feld, managing member, portfolio manager and the head of research at Starboard; (ii) John R. McCormack, an executive partner at Siris Capital Group, a private equity firm that invests in mission-critical, mature tech & telecom businesses at strategic crossroads; (iii) Vanessa Pegueros, former chief trust and security officer of Onelogin, the identity platform for secure, scalable and smart experiences that connect people to technology, and former vice president and chief information security officer of DocuSign (DOCU), the world’s leading way to electronically sign and manage contracts; and (iv) Yael Zheng, professional director and former chief marketing officer of Bill.com Holdings (BILL), a provider of cloud-based software that automates back-office financial operations for small and midsize businesses, and former chief marketing officer at Tintri, a virtualization-focused storage company.

This company enjoys great recurring revenue and a solid business. Customers continue to shift customer service to digital, rather than to the phone. LivePerson, however has had some tough years. However, the company did the right thing and expanded into messaging through chat. LivePerson began to reduce the importance of legacy chat in 2015 and shifted its focus onto newer messaging platforms. The result was two years worth less revenue in 2016 and 2017. Stock fell because of this.

LivePerson stated that it was in hypergrowth mode for 2018 and 2019 after it had sold off its legacy businesses. In 2019, LivePerson saw a 18% increase in revenue and the pandemic became an important catalyst. It saw significant growth in its customer base, and it was able convert additional accounts. The stock closed at $68.43 as of Sept. 23, 2021. LivePerson saw its growth slow down as Covid’s performance declined. The stock plunged nearly 26% within a day after the announcement of its fourth quarter 2021 results. Revenue has been growing since the peak of Covid but it is not as rapid as during the pandemic. The company expects 18% growth in 2022, with 13% organic. The company stock plummeted and ended at $18.10, February 25, 2022.

LivePerson is still a strong business that generates high-recurring income in a growing market. But it isn’t achieving the rapid growth promised. Part of the reason it has not been profitable is because the company is spending a huge amount on R&D trying to augment its business by adding chatbots and AI. Since 2019, R&D spend has increased by 93%. Last year, the company spent $158 million (33% of revenue) on R&D. The company also spent a lot to stimulate growth. They hired Tony Owens, a Salesforce star sales manager, to head LivePerson’s field operations. And they committed to increasing the number of sales reps by 75 to 200 by 2022. Recent expansion was stopped at 140.

Starboard cases show that there are many paths to creating value. Both require better management oversight as well as a disciplined operating strategy. There are many opportunities for growth and margin improvement as a separate entity. Technology companies like this generally have a rule of 40 – that is, a combination of growth and operating margins should exceed 40%. Both organic growth is 13% and operating margins are negative, so there’s room for improvement. Starboard is an expert in optimizing growth and margins at the board level. LivePerson definitely could benefit.

We have seen this many times before in activism – a company built by a brilliant visionary but who may not be the right person to be the public company CEO at this point in its life cycle. Starboard wouldn’t make such a decision without having had several meetings with its CEO and board, as well as deep consideration and analysis. However, despite Robert LoCascio being the longest-tenured CEO of a company listed on the Nasdaq – at 27 years – there has been incredible turnover in senior management, with the company going through three CTOs, three CFOs and three COOs over the last five years. Moreover, the board looks more like a club than an independent board that will hold management accountable – the directors other than LoCascio have served for an average of 10 years. The company’s antiquated corporate governance policies evidence more of a fiefdom than a democracy – staggered board, combined CEO/Chairman role and plurality voting in uncontested elections. Starboard, however, has extensive experience in founder-led businesses (Marvell and Mellanox), and is an ideal activist to address this issue.

Starboard is not very common to receive nominations within their first 13D filing. Starboard clearly made this move to protect their options since the Feb. 25 deadline for nominations was approaching. This should not be taken as a tense situation, or as if they are in limbo. Starboard actually bought all of its position within the past two months. This means that the company is only at the beginning stages of the evaluation process and will require time to discuss the options with management. Starboard also nominated more directors that are up for election in 2022 to protect their rights should the company add additional directors.

The board would add value to any of the Starboard directors. The board’s size (seven directors), means that three Starboard directors can be included in any settlement. This would allow the board to remain small at ten directors. This would be better for the current board than losing a proxy battle in which Starboard might get three out of seven seats. Starboard may have to resort to proxy fighting if its shareholders become dissatisfied by management and performance. Last year, this was evident in the 21% vote withhold at Starboard’s annual meeting. Kevin Lavan is LoCascio’s second-longest-tenured director with a 22 year term.

LivePerson could be sold to avoid a proxy battle. A company’s activist can get the attention and support of strategic investors as well as private equity. This is a company with a great business and an incredibly valuable asset – one of the largest catalogues of written conversations. It is a valuable training data source for companies that are developing machine learning or artificial intelligence. This is something that strategic firms would certainly be interested in.

Ken Squire founded 13D Monitor and is its president. The institutional research company focuses on shareholder activism. Squire also created and manages the 13D Activist Fund mutual fund, which invests in a variety of activist 13D investment strategies. LivePerson is part of the fund.