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Yo-Ho-Ho and a 36% Gain

By Benjamin Shepherd on September 5, 2016

Tech companies say activists are modern day pirates but at least they don’t bury their treasure.

Back in the mercantilist days of the 18th century, when most goods were transported by ship over the high seas, pirates were the bane of a merchant’s existence. Marauders would appear out of nowhere and commandeer a ship, then either ransom it back to its owners or simply make off with the haul and find better markets elsewhere. To hear Silicon Valley tell it, pirates have made a modern day comeback.

Instead of arriving in ships flying the Jolly Roger, today’s freebooters tend to come in SUVs, wearing business suits and their banner of choice is a form 13-D which is just as intimidating as a skull and crossbones. They’re called activist investors these days and, with the 13-D announcing they’ve taken at least a 5% ownership stake in a company and they’ve come for their ransom. Instead of holding management at the point of a saber though, they’ll take seats on the board until the share price has risen to acceptable levels or they’ll sell the company off bit by bit.

Whether or not it’s as dramatic as all that really depends on which side of the table you’re sitting on. While there are still occasional cases where activist investors are just looking for some greenmail, they generally get involved because, for whatever reason, management just hasn’t been able to get a company’s shares to move.

According to a recent report from the Boston Consulting Group, while a typical S&P 1500 company has a 13% chance of being targeted by activist investors, a tech company has a 22% chance. A big reason for that difference is that earnings growth has been slow since the dot-com crash, falling from a compound annual growth rate of 13.3% in the roughly 15 years prior to the crash to just 3.9% since 2005. BCG also looked at 24 recent activist investor cases and found that total shareholder return jumped a compounded average of 36% once the activists got involved.

Granted, the time periods over which those returns were realized varied, but they definitely make it worthwhile for both the activists and other investors. How those returns were realized also varied, ranging from management actually getting its act together and turning a profit, to divestures and mergers. But going after tech companies is clearly profitable.

Covisint Corp (NSDQ: COVS) builds software that securely identifies users and allows them to connect with other systems. For instance, it makes Blue Link, which allows Hyundai drivers to remotely start and stop their car’s engine or set cabin temperature through a smartphone application. But it also works with Ford, GM and a number of other companies.

Covisint was spun off from Compuware back in 2013, and at the time of its initial public offering its shares were priced at $10. Its stock price peaked at $13.74 on their first day of trading and got as high as $14.46 a month following its IPO, but since then they’ve just drifted downward. As of the close on Friday, its shares were trading at $2.25 – a better than 4% jump on the day after news broke that the company was bending to an activist investor.

A number of investors have taken big stakes in the company since May, including Roumell Asset Management and Neuberger Berman, at roughly 5% each. Most recently though, noted short seller Dialectic Capital Management announced that it had taken a 6.2% stake in the company and that management had agreed to appoint three new independent directors to its board. Considering that most of these big investors have been pushing the company to conduct a “strategic review,” otherwise known as courting buyers, it’s safe to assume that these new directors will be helping with that.

Covisint has been hesitant to sell itself off because, as even the activists have noted in their SEC filings, its technology has been recognized as some of the best in the automotive industry. But for whatever reason, the market has failed to recognize that and reward shareholders. As a result, the best bet might be to sell itself to another tech company or even one of the major automakers.

Considering the big one-day jump the shares made on the news, apparently the rest of Covisint’s investors agree with that proposition. The nice thing is, even if activist investors are the modern day pirates tech companies make them out to be, at least they don’t bury their treasure.


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