Tech Shareholder Activism Increasing

As M&A picks up generally, and the tech sector in particular, shareholder activism is on the rise as well.

Activism Monthly’s (which is about business rabble-rousing, not social rabble-rousing) latest issue includes an article discussing the technology industry.  According to the article, three Underdisclosed.com favorites are particularly active in this arena, Elliott Associates, Starboard Value and Icahn Enterprises.

The most prolific activist investor among technology firms is Starboard Value, which has publicly agitated for various governance and strategy changes at 19 technology companies since 2010. Elliott Management, the $23 billion hedge fund run by Paul Singer is in second place with 11 campaigns, followed by Icahn Enterprises on 10.

Tech sector appeal remains broad, particularly as deal size grows.  Activism Monthly notes that the number of companies targeted by shareholder activists grew by 15% in 2013 with average market cap for targeted companies is $7.8 billion so far in 2014 (not even including recent agitation at Microsoft, Apple and Hewlett Packard). As one MD says:

“What has become clearer in the last year or so is that if companies hesitate to do this themselves, activist investors will step in and do it for them.”

Posted in Activist Investor, Carl Icahn, Elliott Associates, Hedge Funds, Shareholder Rights, Starboard Value | Tagged , , , , , , , , , , | Leave a comment

Groupon Director Not Seeking Re-election

Logo - Groupon

Groupon director not standing for re-election.

Groupon to reduce size of board as one director does not stand for re-election.

Groupon filed its proxy statement with the SEC.  The proxy statement included the news that Mellody Hobson has not been re-nominated and her term as director will expire at Groupon’s next annual meeting.  The board will be reduced from eight to seven.

Ms. Hobson was one of the independent directors, but Groupon will continue to have enough independent directors to satisfy its listing requirements.

Who is Mellody Hobson, you ask?  Let’s let Groupon explain:

“Mellody Hobson has served has served on our Board since June 2011. Ms. Hobson has served as the president and a director of Ariel Investments, LLC, a Chicago-based investment management firm, since 2000, as the chairman since 2006, and as a trustee of the mutual funds it manages since 1993. She previously served as senior vice president and director of marketing at Ariel Capital Management, Inc. from 1994 to 2000, and as vice president of marketing at Ariel Capital Management, Inc. from 1991 to 1994. Ms. Hobson has served as a director of Starbucks, Inc. (NASDAQ: SBUX) since February 2005, DreamWorks Animation SKG, Inc. (NASDAQ: DWA) since 2004 (chairman since 2012) and The Estee Lauder Companies, Inc. (NYSE: EL) since 2004. Ms. Hobson works with a variety of civic and professional institutions, including serving as a director of the Field Museum, the Chicago Public Education Fund and the Sundance Institute. Additionally, she is on the board of governors of the Investment Company Institute. Ms. Hobson received her Bachelor of Arts from Princeton University. Ms. Hobson brings to the Board significant operational, investment and financial experience and valuable knowledge of corporate governance and similar issues from her service on other publicly-traded companies’ boards of directors as well as her current service on the Securities and Exchange Commission Investment Advisory Committee.”

It seems like something is missing from the bio.  Oh yeah, she is married to George Lucas, of Star Wars fame.

This follows news of Groupon’s Elite Deal Series launch as Groupon tries to right the financial ship.  Groupon lost $88.9 million in 2013, an increase from an $51.0 million loss in 2012.  This was peanuts compared to a $297.8 million loss in 2011.

GRPN shares are down from 11.85/share to start 2014, having closed at $7.37/share at this writing.  Ms. Hobson owned (or had the right to acquire) 74,834 shares of Groupon common stock, worth about $552,000, which is barely a rounding error to the Lucas household.

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Price of Going Public – Facebook Deals With Shareholder Proposals In Proxy Statement For Annual Meeting

Logo - FacebookShareholder proposals in the Facebook proxy statement demonstrate some of the disadvantages of being a prominent public company.

Facebook has filed its proxy statement for its upcoming annual meeting on May 22, 2014.  I’m sure they look back fondly on their days as a private company when they didn’t have to deal with the silliness of actually having to response to a proposal of a holder of 100 shares (out of 1.99 billion shares).

Facebook’s proxy includes five shareholder proposals, which will be voted upon at the meeting if the proponents of the proposals are present at the meeting and submit the proposals for a vote.  Ain’t corporate democracy wonderful?

Two holders of 100 shares don’t like the dual class voting structure and want to change it “to protect shareholder value.”

Some nuns with less than 1,000 shares want more disclosure around Facebook’s lobbying activity.

A pension plan with less than 250 shares wants Facebook to create and implement a policy “with consistent incorporation of corporate values as defined by Facebook’s policies and public affirmations into Company and FB PAC political and electioneering contribution decisions, and requiring reporting to shareholders at reasonable expense and excluding confidential information on a quarterly basis listing any electioneering or political contribution expenditures occurring during the prior quarter, identifying any contributions that raised an issue of congruency with corporate values, and stating the justification for any such exceptions.”  Whatever that means.

More nuns with 100 shares are worked up over childhood obesity and food marketing to youth and want Facebook to produce a report about it.

The Comptroller of New York, with about 314,000 shares, wants to waste Facebook’s time with a sustainability report.

All this demonstrates that Facebook now gets to spend its time and energy responding to various corporate governance and interest group cranks over things that have nothing to do with selling advertising and generating fees for in-app payments.  Welcome to the grown up public company world.

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Globoforce IPO Coming Soon, Smaller Than Expected.

Globoforce IPO downsized; net proceeds and selling shareholders hardest hit.

Globoforce logo

Globoforce downsizes IPO

Globoforce’s IPO is expected soon, as early as this week.  However, not is all rosy in Dublin-by-way-of-Massachusetts.

Earlier this week, Globoforce was planning to sell about 4.4 million shares at an offering price between $16 to $18/share.  At the mid-point of the range, they would have raised $50 million, or $38.8 million net of expenses. It would have valued the company at about $456.6 million before trading.

The selling shareholders were slated to sell about 1.5 million shares, which would have stuffed $25 million into their pockets, including about $10.3 million to Balderton Capital, who owns over 40% of Gloforce.

In an updated filing this week, the IPO was downsized and the IPO price was reduced.  The price range is now $14 to $15/share, which puts a pre-trading value of the company at mid-range of $389.5 million.

In addition, the number of shares being sold in the IPO was reduced by 606,797, all of which were to be sold for Balderton’s account.  Not only was the market not quite as receptive to the deal as expected, either there was not quite as much appetite for shares as expected and/or the market did not appreciate Balderton reducing its position.

We believe that it was an offering size issue, and Balderton removed its shares from the offering to make the offering size more palatable.  It may have been a tougher sell to reduce the shares being sold for Globoforce, as it would have reduced its offering proceeds considerably more than the reduction in offering price alone.  Also, the shares Balderton expected to sell in the offering was a small piece of its holdings and of the overall amount of shares offered.

It seems unlikely that Balderton’s selling was a point of contention with IPO investors, but Balderton’s pulling back was probably a vote of confidence for an offering that seems to have been on the ropes.  If this is the case, we applaud Balderton for supporting its portfolio company.  There were approximately two dozen other selling shareholders whose portion of offered shares was not reduced, including the CEO and a VP of Global Sales.

In case you’re wondering, Globoforce is a ”leading provider of a cloud-based, social recognition software solution that organizations use to engage their employees worldwide to create alignment with values and advance company goals and culture.”

Not Globoforce.


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Castlight Health Soars In IPO. Why?

Castlight Health prices IPO above range, shares rise sharply in debut. Do Castlight’s results and prospects justify its valuation?

Logo - Castlight

Castlight Health prices IPO

 

Castlight Health, Inc. (NYSE: CSLT) went on the road for its IPO with a prospectus offering 11.1 million shares of common stock at a price range of $13 to $15/share. The deal priced above the range at $16/share, raising about $177.6 million before expenses and commissions.  It closed at $39.80/share, for a 148.75% pop.

Castlight’s common stock is divided between:

  • Class A – held by insiders and has stronger voting power than Class B
  • Class B – offered to the public

Let’s value the Class A and B the same, without even trying to calculate the increase in the price per share of the Class A to account for the voting disparity or for any liquidity discount (since it is not the listed security). This means that:

  • Castlight went public at a market cap of almost $1.4 billion
  • Castlight has a current market cap of almost $3.45 billion

A tech company in the healthcare software space. Throw in a nod to “cloud computing” and “Big Data,” and a multi-billion dollar market cap makes sense, right?

Let’s be realistic for a minute. Castlight was founded in 2008. The high points:

  • In its latest and fifth year, it generated $13.0 million in revenue
  • It lost $62.2 million dollars last year

Castlight says it has “more than 95 customers,” 24 of which are Fortune 500 companies. Fine. Let’s assume it had all of those customers in 2013. That comes to less than $150,000 per customer per year. In that light, it took $33.7 million dollars in sales and marketing to generate $13.0 million in revenues. If they got the entire Fortune 500, they would have revenue of $75.0 million per year before taking expenses into account.  Does that justify its valuation?

Not fair, you say. Many of those customers could have shown up late in the year and are not fully reflected in the financials. Okay. Let’s look at an earlier filing that included an interim period. It appears that approximately $5.1 million in revenue was recognized in Q4 of 2013. Let’s give them the benefit of that doubt and annualize Q4, that would be $20.4 million in revenue and a whopping loss of $41.8 million without assuming additional sales and marketing expenses to attract the additional revenue.

Using a quick and dirty stock screener for other companies with a similar market cap, we find Cepheid, which trades on Nasdaq and has a market cap of about $3.74 billion, just north of Castlight’s market cap.  Like Castlight, it also has losses. Unlike Castlight, Cepheid has over $400 million in annual revenue!  And its losses are smaller than Castlight’s losses!

We haven’t even begun dissecting its business plan yet, which is a subject for our research clients.

I’m sure Castlight is a fine company with fine people involved. But how on earth is this company worth over $3 billion?

CSLT reaches Higher Ground.

 

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HubSpot Files IPO Docs, Reportedly

HubSpot files IPO documents on a confidential basis and has chosen bankers, according to news reports.

HubSpot Logo

HubSpot is preparing for its IPO.

HubSpot, which offers an “inbound marketing software platform that helps companies attract visitors, convert leads, and close customers,” reportedly filed confidential IPO documents with the SEC.

HubSpot is in a hot area, with the SaaS marketing app companies on tear lately.

Marketo (Nasdaq: MKTO) went public last May at $13.00 share and closed today at the oddly even amount of $41.00/share.

Responsys went public in April 2011 at $12.00/share and was acquired by Oracle earlier this year for $1.5 billion, or $27.00 per share.

Eloqua went public in August 2012 at $11.50/share and was acquired by Oracle (sense a trend?) in December 2012 for $23.50/share.

ExactTarget went public in March 2012 at $19.00/share and was acquired by Salesforce in June 2013 for $2.5 billion, or $33.75/share.

With online companies fighting for attention and market share, it is likely that the online inbound and outbound marketing companies will continue to be attractive to investors and acquirors.

 

Full disclosure: We are an investor/founder of an online advertising analytics company that is currently in pre-release. As of this writing, we have no interest in any of the companies mentioned

Posted in Business Strategy, IPO, M&A, Public Offering, Uncategorized | Tagged , , , , , , , , , , , , , , | Leave a comment

Dropbox Raises A Few Million Ahead Of Reported IPO

Dropbox conducts private placement; raises cash ahead of purported IPO.

Dropbox has been one of the more anticipated IPO candidates for a while.  Rumor has it that rival Box beat it to the punch with a confidential IPO filing after announcing a $100 million funding.

Logo - Dropbox

Dropbox raises cash ahead of rumored IPO.

Even if Dropbox does decide to go public, it may not be just for the cash. Dropbox made an SEC filing disclosing that it raised $325 million in a private offering, out of a total offering size of $450 million. Allen & Company and Goldman Sachs were the bankers and received a combined $8.1 million for their efforts. The valuation was reportable around $10 billion.

Dropbox also hired the former head of Motorola Mobility as COO, indicating that it is bringing experienced people with public company experience on board.

Logo - Box.com

Box reportedly beat Dropbox to the IPO.

We’re looking forward to a deeper dive into the business model when Box and Dropbox finally file their IPO docs publicly.

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Facebook Age Data – How Reliable?

Facebook age data may not be reliable, says Facebook.

Facebook has always warned about the validity of its key metrics, such as:

  • Daily active users (DAUs)
  • Mobile DAUs
  • Monthly active users (MAUs)
  • Mobile MAUs
  • Average revenue per user (ARPU)
Logo - Facebook

Facebook sees decline in use by younger audience, but disputes its own data.

These metrics are calculated using Facebook’s internal data. User behavior may skew the results. For example, people may maintain more than one account. This is a violation of Facebook’s policies, but it may happen. (Ed note: This is our shocked face.)

In its recent Form 10-K, Facebook included a new caveat regarding the data for its younger users. Is this bad? Facebook wants these users, but data points suggest that younger users are jumping ship.

Don’t fret, Facebook tells advertisers and investors. The data regarding declining use by younger users may not be reliable.

“For example, while user-provided data indicates a decline in usage among younger users, this age data is unreliable because a disproportionate number of our younger users register with an inaccurate age.”

So Facebook worked to make it more reliable. How is that working out?

“These models suggested that usage by U.S. teens overall was stable, but that DAUs among younger U.S. teens had declined. The data and models we are using are not precise and our understanding of usage by age group may not be complete.”

In one respect, Facebook is downplaying its declining usage by younger users. However, Facebook also recognizes the danger of losing the “Cool Factor” among younger users.

“We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook, and we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with these other products and services.”

Facebook recognizes that competition, particularly for the younger audience, in online and mobile applications is fierce. Facebook must keep fighting to keep these users. Calling the data “unreliable” does not change the perception or the risk of losing these users.

Youth of the Nation abandoning Facebook?

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Gold v. Bitcoin? “Gold,” Says Hedge Fund Manager

Gold, not Bitcoin, is the real currency alternative, says Paul Singer.

Underdisclosed.com favorite Paul Singer, of Elliott Associates fame, is not quite as taken with the current flavor-of-the-month in alternative currencies according to WSJ and CNBC reports. Singer reportedly wrote in an investor letter:

“We think that gold is a unique investment asset, the only real money that has stood the test of time throughout recorded history,”

In case you thought there was some wiggle room in his conclusion, Singer continued:

“There is no more reason to believe that bitcoin will stand the test of time than that governments will protect the value of government-created money, although bitcoin is newer and we always look at babies with hope.”

Bitcoin

Paul Singer of Elliott Associates prefers gold to Bitcoin.

Singer also points out one attractive aspect of gold that seemingly attracts the Bitcoin crowd as well:

“[I]t is a store of value that should be particularly attractive at a time when monetary debasement is the major policy practiced by most developed countries to keep their economies afloat.”

Singer is a fan of gold at this time:

“Gold is out of fashion, but we think the explanation for why it has been drifting down is not compelling. The economy seems stuck in the doldrums, but most so-called ‘experts’ have been changing their minds almost weekly about when they think the economy will finally begin a long-term acceleration to the upside,”

, which he thinks will be back in favor soon:

“If the global economy recovers strongly without a significant uptick in inflation, then gold might continue to be a neglected asset class. But low growth and high inflation are typical hallmarks of structurally unsound economies experiencing monetary debasement, so perhaps that phase is next, or soon to appear . . . We shall see.”

The Elliott Associates fund made 12.4% in 2013, with annualized returns of 14.0% since 1977. Its Elliott International Ltd. fund gained 11.8% last year.

Posted in Bitcoin, Business Strategy, Economics, Elliott Associates, Hedge Funds, Uncategorized | Tagged , , , , , | Leave a comment

Zynga Ride Continues With Acquisition Of Mobile Gaming Company And More Layoffs

Zynga sees surge after news of acquisition and layoffs and earnings release.

Logo - Zynga

Zynga acquires NaturalMotion

Logo - NaturalMotion
NaturalMotion acquired by Zynga

Yesterday, Zynga announced that it had acquired NaturalMotion, a creator of mobile games and animation software. Zynga will pay $391 million in cash and 39.8 million shares of Zynga’s Class A Common Stock for NaturalMotion. Approximately 11.6 million of the shares will be issued to continuing employees, subject to certain vesting conditions over a three-year period. All of this is subject to extremely intricate legalese that I won’t bore you with.

To the delight of its stock analysts and new formerly NaturalMotion employees, Zynga also announced a reduction in force of approximately 314 employees, constituting approximately 15% of its workforce. Zynga will incur up to $18.5 million in total restructuring expenses as a result. It feels like only six months ago when we last discussed a Zynga downsizing.

Zynga also issued its 4Q and year end financial results. Let’s get crazy:

Date

Revenue*

Change from Previous Year*

 

Stock Price Day After Release

12/31/12

 

 

 

 

Fiscal Quarter

311,165

(72)

flat

$2.99

Fiscal Year

1,281,267

141,167

12.4%

583,862,093 shares outstanding**

 

 

 

 

$1.7 billion

12/13/13

 

 

 

 

Fiscal Quarter

176,362

(134,803)

(43.3%)

$4.40

Fiscal Year

873,266

(408,001)

(31.8%)

659,687,109 shares outstanding**

       

$2.9 billion

____________
*Dollars in thousands.
**Based on immediately preceding Form 10-Q

Umm, so a company with 30% less revenue in 2013 than 2012 is worth 40% more after announcing 2013 results than it was after announcing 2012 results?

Was there a silver lining? We suppose only losing $37 million in 2013 versus $209 million in 2012 is a good sign. That plus a Hail Mary acquisition and more layoffs equals a 23.6% pop in the stock price.

 

 

 

Posted in Business Strategy, By the Numbers, Earnings Release, Gaming, M&A | Tagged , , , , , , , , , , | Leave a comment