Engaged Capital activist fund can turn to a familiar strategy to boost performance at Quotient
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Company: Quotient Technology, Inc. (QUOT)
Business: Quotient technology operates as a digital media and advertising technology company providing powerful integrated digital communications and promotions for brands and retailers. The Company operates through two segments: (i) Promotion segment, which offers digital coupons, and (ii) Digital Media segment, which provides targeted advertisements to customers. row. The company has built some of the most valuable customer shopping data insights using industry leading technology, allowing it to work efficiently with more than 800 Consumer Packaged Goods companies ( CPG) and many leading retailers.
Stock market value: $689.2 Million ($7.30 per share)
Activist: Participating capital
Ownership rate: 6.47%
Average costs: $6.46
Activist comments: 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 two- to five-year investment horizons. Its style is to keep managers and boards accountable behind closed doors. Engaged has been an investor in Quotient since late 2020, taking profits when the stock jumps and buying more when the stock falls back.
What is happening?
Above November 17, 2021, Engaged sent a letter to the board highlighting the company’s underperformance relative to its peers, poor corporate governance practices, and operating issues. In addition, Engaged has requested an exemption from the company’s recently announced tax benefit preservation plan, which will be implemented if shareholders acquire beneficial ownership over 4.9%, to allows Engaged to obtain beneficial ownership of up to 9.99%.
Behind the scene:
This is an industry that is experiencing glaring secular difficulties as coupons and advertising continue to move from print to digital and as e-commerce expands. These coils are only magnified by the Covid environment. However, the company has consistently had poor performance – in its most recent quarter, it cut guidance and reported the loss of one of its biggest partners, Albertsons. For the past four years, the company has consistently missed quarterly guidance meetings. As a result, over the past five years, the company has outperformed its peers by more than 500%, is trading close to all-time lows, and has underperformed the S&P 500 over the 1-, 3-, and 5-year periods. is -27.91%. -112.25% and -152.87% respectively.
The problem with Quotient is similar to that of many other activist goals: It’s a public company still run by its founder like a private company with cumbersome cost structures and governance. horrible company. All the obvious signs of poor corporate governance are there – chaotic boards of directors, president/CEOs, majority voting in unchecked elections, etc – all what most companies did years ago. However, two more glaring examples of an entrenched board are (i) the antidote company has a net operating loss of 4.9% at the same time that Engaged is buying its position – Quotient always had significant NOLs and never had No Pill, but suddenly felt an immediate need for a pill without the need for shareholders to vote simultaneously with an activist showing up; and (ii) replace a resigned director with a new director by placing the new director in the category of non-elected directors until 2024 and reducing the number of directors elected this year from three to two. Good corporate governance will require that new directors be elected as soon as possible, especially if that does not mean a change in composition. There is no reason for this change other than to make it difficult for shareholders to fundamentally change the composition of the board of directors.
This bad corporate governance isn’t just an academic problem – it’s a real problem for shareholders as it has led to leadership problems, a failed succession plan and terrible profits. . Steve Boal is the founder, president/CEO of the company and has been since 1998. Boal left the CEO position in 2017 but remained chairman and returned to the CEO position just two years later. that, never really replace yourself, Mir Aamir, a fair chance of success. Through all of this, the company is down about 53% compared to IPO price in 2014 and is guiding EBITDA margins of 7% to 8% compared to 35%+ margins for similar AdTech businesses.
There are two options here to create shareholder value: (i) bring in new management with in-depth digital advertising experience to run the business more efficiently for shareholders, or (ii) sell to a strategic investor with a management team that can better manage this business – it is rumored that there is interest in the company but management is reluctant to participate. Either is not a good scenario for Steve Boal.
The question is how do you accomplish either of those tasks with a board of eight, with only two directors running for election this year? Yes, there is a way, and Engaged has done it before. Engaged faced almost the exact same situation during its 2017 active campaign at Rent-A-Center – founder/chairman/CEO Mark Speese stepped down as CEO in 2014. , retained the chairman role and returned to the CEO role three years later in 2017. Join nominated an exhaustive list of three directors to the incredible board that same year, winning a proxy battle and removing three incumbents, including the president/director executive Mark Speede. Six months later, Speese stepped down as CEO.
Interestingly, of the two seats contested at Quotient this year, one of them is Chairman/CEO Steve Boal. Do you think Engaged would hesitate to follow the Rent-A-Center playbook here? The numbers speak for themselves – during its four-and-a-half year campaign at Rent-A-Center, Engaged collected 238.01% versus 85.33% for the S&P 500 over the same time period. Having said all this, it goes without saying that it is unlikely that the company would grant Engaged an exemption to purchase up to 9.99% of the company’s common stock.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder performance, and the founder and portfolio manager of 13D Activity Fund, a mutual fund. invest in a portfolio of 13D activists.
