BENGALURU: Activist hedge fund Elliott Management Services disclosed a 4% stake in Cognizant and asked the IT company to shake up its board, raise its buyback and initiate a dividend to boost its share price.
This is the first time an Indian IT firm is facing an onslaught from an activist hedge fund and Elliott has a number of wins under its belt. In 2015, it successfully pushed software firm Informatica to sell itself to PE buyers and got Citrix’s CEO to resign and was given a board seat in that company.
In a 16-page letter posted on its website, the hedge fund outlined a ‘Cognizant Value-Enhancement Plan’ aimed at boosting the company’s stock price. Cognizant’s shares have been under pressure this year after the company cut its guidance for the year three times and disclosed that it had made payments in India that fell foul of the US Foreign Corrupt Practices Act.
“We believe that Cognizant can achieve a value of $80-$90+ per share by the end of 2017, representing an upside of 50% to 69% in just over a year,” Jesse Cohn, senior portfolio manager at Elliott, said at the start of his letter to Cognizant’s CEO and its board.
Cognizant’s shares rose nearly 10% to $57.62 in early trade on Nasdaq.
The letter critiqued Cognizant’s capital management strategy and called its stance shareholder unfriendly due to the lack of a dividend. The plan calls for a $2.5 billion share repurchase to be completed by the first half of FY17 funded with $1 billion in cash on hand and $1.5 billion in debt.
“Cognizant should immediately institute a long-term capital return programme with a commitment to return 75% of US free cash flow to shareholders,” Cohn added in the letter. Cohn asked Cognizant to implement a dividend with a 1.5% yield. Elliott letter was also critical about the long-tenure of Cognizant’s executives and board given the `underperformance’ of its share price. More than half of Cognizant’s directors have been on the Board for at least nine years, the letter said. Of the 12 named executives from the company’s proxy materials, eight have been with Cognizant even before its IPO, which was more than 18 years ago, it added.
“Given the sustained share price underperformance at Cognizant, we believe directors with new experiences, skills and perspectives would be welcome,” Cohn said. Elliott also wants Cognizant to tweak its compensation criteria to rely less on revenue growth and more on earnings growth and shareholder return.
Cognizant did not respond to a message seeking comment on Elliott’s letter.
RW Baird analyst David Koning said he liked the stock for similar reasons as Elliott.”Revenue growth ~10% with quite insulated adjusted margins ~20%.Elliott willing to unleash the insulation up to 23-24%. Net cash of 10%+ of market cap likely ends year near 15%.Elliott wants to use for EPS accretion dividend,” Koning said in a note.
Koning added that Elliott was also focusing on bringing improvements to Cognizant’s sales and delivery structure. The letter stated that Cognizant should optimise its twoin-the-box model, especially with non-specific clients, streamline sales by reducing non-selling resources and clarifying profit and loss responsibilities and trim its HR and finance departments.