Wall Street Journal: Activist Funds Gearing Up For A Big 2015

Activist investors to continue providing employment support to analysts.

WSJ reports that activist investors have raised billions of dollars for campaigns that may take shape in 2015.  For those of us who review companies and deals for investors, we say “Hooray.”  Funds looking for potential targets and arbs sniffing around presumed, proposed and announced deals should have a busy year.

Through November, activists held $115.5 billion in assets, up from $93 billion to start the year, according to hedge-fund tracker HFR.

Familiar names like Ackman, Loeb and Icahn were featured prominently.  In addition to the bankroll, recent history is providing some confidence.

The success the investors enjoyed in getting their way in 2014 will test them in the coming years as companies they now control are scrutinized for signs that promised changes are paying off. If not, activists risk losing the support of other investors they rely on.

Split-ups and Spin-offs seem to be the popular request these days, with targets such as EMC, eBay/PayPal, DuPont and PepsiCo.



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Our Prediction for 2015

Most predictions for 2015 will be wrong, subject only to statistical chances for accidentally being correct.

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Shake Shack Files for IPO

Serving up burgers, fries, ice cream and Enlightened Hospitality.

Shake ShackShake Shack files for IPO.

Shake Shack is not just the latest casual dining company filing to go public, it is a modern day “roadside” burger stand.

It was founded by Danny Meyer, who must be prominent in the industry since he is name checked a few dozen times in the filing. For example,

The principles of “Enlightened Hospitality,” as defined by Danny Meyer, state that we prioritize our own people above all else, because we understand that taking care of each other is the foundation that enables us to provide uncommon excellence and hospitality to our team members, guests, our community, our suppliers and our investors. We refer to our customers as “guests,” as we treat anyone who walks into our restaurants, or “Shacks,” as if they were guests in our home.

Getting past the corporate niceties, Shake Shack had $78.6 million in sales in 2013, up from $55.6 million in 2012. There was also some licensing revenue that was minor in comparison. Net income was $5.4 million in 2013 (6.6% margin), up from $4.1 million in 2012 (7.9% margin).

The prospectus claims non-GAAP profit margins exceeding 25%, but that is at the unit-level and ignores substantial expenses.

We’ll see how they do as compared to the likes of recent restaurant and consumer food companies like Papa Murphy’s (FRSH), El Pollo Loco (LOCO) and Potbelly’s (PBPB).

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Facebook Mobile Ad Network Ready For Launch?

The Facebook mobile ad network is reportedly ready for announcement at the end of the month.

Logo - Facebook
Facebook reportedly to announce Facebook Mobile Ad Network this month.

We have made the case over and over again about how Facebook in particular, and consumer-facing online companies in general, will need to get their mobile house in order if they want to survive. Facebook was very vulnerable to this while its public company life was in its infancy. However, it has continued to improve its mobile strategy.
Along these lines, there are reports that Facebook will unveil the Facebook mobile ad network at its F8 conference at the end of the month. According to Re/Code:

“Facebook will pitch the ads to publishers and developers as a way to leverage the social network’s vast database of user information for better ad targeting. And Facebook wins by expanding its ad reach — now it can make money from its billion-plus users even when they’re not on Facebook’s own properties.”

Mobile is the driver of growth, but size, mobile OS’s and user behavior make it difficult to deliver ads that will drive customers to advertisers and ad dollars to Facebook. As Facebook has continued to shift its focus to mobile, it has experimented with how it can provide more ads to mobile users.

“A good chunk of that — perhaps 50 percent or more — comes from “app-install” ads, which prompt users to download apps or re-engage with apps they’ve already installed. The ad product was initially an afterthought in Facebook’s mobile ad strategy, led by Facebook engineering and platform leader Mike Vernal, who at one point only had a single engineer working on the project.”

There is plenty of existing competition for a Facebook mobile ad network. Existing players include such enterprise-level companies as Google and mobile ad upstarts like Twitter. Other lesser-known networks are also everywhere on the mobile Net.

“Facebook won’t be playing in the space alone. The company will take on Google’s existing AdMob mobile network, as well as smaller players like Millennial Media. And now Twitter is entering the fray, by linking its MoPub ad network to its ad buying platform, and rolling out app install ads of its own.”

Something tells us that Facebook does not particularly worry about competition, particularly with the inclusive Facebook environment as a base.

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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

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