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

Brendan McDermid | Reuters

Successful activist investor Starboard is part of a turnaround situation where a great deal of value can often be created — when a founder-CEO is replaced with a public company CEO with more discipline and shareholder focus.

Company: Green Dot Corp. (GDOT)

  • Business: The company is a provider of re-loadable prepaid debit cards and cash reload processing services in the United States.
  • Stock market value: $1.8 billion ($33.50 a share)

Activist: Starboard Value

  • Ownership: 9.3%
  • Average cost: $26.39
  • Activist Commentary: Starboard has extensive experience helping companies focus on operational efficiency and margin improvement.

What’s happening?

On February 3, 2020, Starboard reported a significant position in Green Dot in the midst of a transition in leadership from the founder  to a new CEO trying to take the company to the next level.

Behind the scenes:

Starboard has watched this stock for a long time – it has been volatile since it went public in 2010 and most recently, the stock fell from a high of $91.51 in September 2018 to $21.97 last December due to heightened competition, growth deceleration and poor execution, resulting in consistent lowering of guidance over four consecutive quarters.

Interestingly, the company was the subject of an activist campaign in 2016 by Harvest Capital Strategies, where Harvest pushed for the founder and CEO, Steven Streit to be replaced and Harvest successfully got two of its three nominees elected to the board. Streit, however, retained his position. This is a typical situation we often see at a founder-run company, particularly for Starboard.

In situations like this there is a great deal of value that can be created by replacing the founder-CEO with a public company CEO with more discipline and shareholder focus. The two impediments to that strategy are removing the founder and finding the right CEO. In this case, at the time of Starboard’s investment the first one has already been accomplished and the second one was somewhat obvious.

On December 31, 2019, Streit retired as president, CEO and director and co-founder/CFO, Mark Shifke resigned from the company. So, the hard part was over before Starboard even got started. The first opportunity to create value was finding the right CEO and Starboard was certainly going to inject itself into that process.

The logical choice was former NetSpend CEO Dan Henry. During Harvest Capital’s proxy fight in 2016, the Wall Street Journal published an article speculating that Henry was a leading candidate for the role if Streit were to be removed. In fact, Henry bought $500,000 of ‘GDOT’ stock after Harvest’s campaign was announced and said he would sell his shares if Harvest could not remove Streit. GDOT and NetSpend are very similar companies and Henry could potentially do at GDOT what he did at NetSpend.

Both companies went public in 2010. When it was sold to Total System Services Inc. in 2013 for $1.4 billion, NetSpend shares were worth 46% more than the initial public offering price. Today, over six years after the NetSpend sale, Green Dot still trades below its IPO price of $36 per share.

On March 25, 2020, the company announced that it had appointed Dan Henry as its new CEO. Once a new CEO is hired, there are additional opportunities to create value. The company can focus on its operations as a standalone company and balancing growth initiatives, improving margins and optimizing capital allocation.

Then there are a few interesting strategic paths that could be evaluated for the company. If Green Dot wanted to explore a sale, it would likely first have to sell its deposits business so it is no longer regulated as a bank holding company, making the company’s pre-paid debit card business much more attractive to a wider universe of buyers. A better option might be for the company to remain a bank holding company, giving it an advantage over some of its peers and it could explore its own accretive acquisitions, including potentially acquiring NetSpend where there would be a ton of synergies.

NetSpend is the company’s only pure-play competitor that is now a small non-core subsidiary of Global Payments. Whatever the company decides, this is a situation where a shareholder like Starboard could be very helpful in modeling out the different strategic and operational opportunities for the company to see what the most optimal path is for shareholder value. Like all Starboard situations, we expect them to be looking for some board representation here, but not nearly the level they would have been looking for if Streit were still in control. A couple of board seats would probably suffice.

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

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