Starboard, a very successful activist investor with extensive operational activism experience helping boards and management teams run companies more efficiently, is taking aim at a business software company.

Activist Spotlight

  • Target: Commvault Systems (CVLT)
  • What’s Happening: Starboard Value is nominating four directors to the company’s 11 person staggered board.
  • Business: Provider of data and information management software applications
  • Stock-Market value: $1.99 billion ($39.97/share)
  • Investor’s average cost per share:  $35.76

Key Numbers: 

  • (34.8%), (20.5%), (12.7%): CVLT’s 1-, 3- and 5-year return, versus 1%, 30.3% and 53% for the S&P 500.
  • 23.92%: Starboard’s average return on the 98 13D filings it has made in its history (versus 9.02% for the S&P 500 during the same time periods).
  • 35.32%: Starboard’s average return on the 40 13D filings it has made on technology companies in its history (versus 13.69% for the S&P-500 during the same time periods).

Behind the scenes:

While CVLT today has a best-in-class product with strong technology, profitability and stock price performance has continued to languish and there are issues with the go-to-market strategy and sales efficiency. Moreover, last year, the company made the speculative acquisition of Hedvig, a company that has no revenue, for $225 million.

Technology companies like CVLT generally have a “rule of 40” – where a combination of growth and operating margins should exceed 40%. The company could easily be growing in the 5% to 7% range going forward. Its operating margins are currently in the mid-teens, well short of the 25% target the company has previously set, and with a disciplined strategy, could even exceed 30%.

The company could also use a more disciplined capital allocation strategy. The acquisition of Hedvig was ill advised and Starboard would likely want the company to forego any other acquisitions until it optimized its operations. A company needs to earn the right to speculative M&A and this company has not earned that yet.

This is a situation where stockholders could greatly benefit from someone coming in from the outside to instill cost discipline. The best way to accomplish this would be through a board refreshment, and this is a board that can use refreshing — three of the four directors up for re-election have an average tenure of 17 years.

Jeffrey Smith, CEO of Starboard Value LP and Chairman of Papa John’s International Inc.

Brendan McDermid | Reuters

Starboard has a significant history of improving margins at technology companies from a board level, and has nominated a qualified slate of directors with backgrounds spanning operations, finance, data management and storage, technology, cybersecurity, mergers and acquisitions, cloud computing, strategic transformation, and public company governance.

Commvault was previously engaged by Elliott Management through a 13D filing made on April 2, 2018 and Elliott entered into a cooperation agreement with the company on May 1, 2018 for two board seats, both of whom are presently on the board and one of whom is up for re-election in 2020 and would be replaced by a Starboard nominee if Starboard is successful.

However, Elliott has since sold its position, so any activist pressure was immediately off the company after Elliott’s exit.

Once there is fresh blood and perspective on the board, the reconstituted board can decide how to progress. The company’s CEO, Sanjay Mirchandani, was just appointed in February of 2019 so he is not necessarily part of the problem.

He may just need more time to implement discipline or it is also possible that he is being restrained by the current board, and would welcome new shareholder directors on the Board.

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