Why Elliott Management Wants Its Say (and Profit) in Commvault

Companies have seen mixed rewards and mixed responses when activist investors get involved in the day-to-day operations or in the oversight of the people running daily operations. One firm that is often feared by companies, and revered by investors, is Elliott Management. A press release issued on Monday says that Elliott Management now manages funds that collectively own a 10.3% stake of common stock and economic equivalents of Commvault Systems Inc. (NASDAQ: CVLT).

Elliott, which includes the renowned Paul Singer, has announced that it intends to nominate four candidates to the Commvault board of directors and that it is laying out a plan to create value for Commvault shareholders. And with Elliott being so visible, Commvault already has issued a response.

In addition to Elliott’s four board nominees, a letter to Commvault identified a plan for Commvault to create significant shareholder value. This is said to be through fundamental execution improvements, improvements in operations and capital allocation, and also in governance.

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It turns out that the actual share ownership is 3.336 million shares, for a 7.4% stake. The rest is through derivative agreements in the form of physically settled swaps. The Elliott letter praises the leadership that has been in place, but outlines a case for board nominees as follows:

We believe the actions proposed in this letter will result in greater innovation, enhanced go-to-market productivity, increased channel enablement and more satisfied customers. We are optimistic that we can work together with the board (of directors) to reach a collaborative agreement that will be in the best interests of the company and its shareholders. Elliott has a great deal of experience working constructively with companies that have faced similar issues, and we look forward to commencing our work together to create long-term, sustainable value at Commvault.

Underperformance issues were cited by Elliott going back to 2013, where operating income is down by 37% while revenues have risen by 37%, and whereby Commvault now spends 77% of revenue on operating expenses. Also noted has been a 1,200-basis point decline in margins, and if stock-based compensation are counted then the company has negative profitability.

Commvault’s official response to the letter has been conciliatory rather than adversarial, but time will tell how that progresses. The Commvault response said:

Commvault conducts open communications with its stockholders, and the Board of Directors and management team values their input. Commvault has had initial discussions with Elliott and we go into these discussions with an open mind, a goal of enhancing stockholder value, and optimistic for Commvault’s future.

The four official Elliott’s nominees to the Commvault’s board of directors are as follows:

• Martha Bejar: currently the CEO and co-founder of Unium.
• Wendy Lane: currently serves on the board of Willis Towers Watson, UPM-Kymmene and MSCI.
• John McCormack: former CEO of Websense, and currently CEO of Fidelis Cybersecurity, executive chairman of AppRiver and a director of Ping Identity.
• Chuck Moran: founder and former CEO of Skillsoft.

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Investors are treating the Elliott stake with reverence on Monday. The shares were last seen up 11.7% at $63.91, versus a close last week of $57.20 and a 52-week range of $48.35 to $64.60.

For a reference on the share price over time, Commvault shares were priced at $88 back in 2013, and it fell to under $50 by April of 2014. Its shares have been in a trading range of $45 to $60 for most of the time since then.

It has been too soon to see any analyst reports on the activist stake, but the prior consensus analyst target price from Thomson Reuters was $65.82.

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