A textbook Wall Road activism play is unfolding with underperforming software program firm Virtusa

A battle heats up between a deep-research investor with a non-public fairness mindset and an underperforming small cap software program inventory. It is a textbook case of excellent activism — an organization with poor working historical past, horrible company governance, underperforming inventory, overpaid CEO and a big, long-term shareholder with a really pleasant and cheap request with spectacular director nominees.

• Enterprise: Virtusa’s expertise companies embody info expertise (IT) and enterprise consulting, digital enablement companies, person expertise (UX) design, improvement of IT functions, upkeep and assist companies, techniques integration, infrastructure and managed companies. Its companies allow its shoppers to speed up enterprise outcomes by consolidating, rationalizing and modernizing the shoppers’ core customer-facing processes into a number of core techniques.
• Inventory Market Worth: $924 million ($30.67 per share)

• Useful Possession:  8.98%
• Financial Publicity: Along with the 2,706,161 (8.98%) shares of widespread inventory owned by New Mountain, they’ve financial publicity, however not voting management, to 540,654 shares underlying cash-settled swaps for a complete financial publicity of three,246,815 shares (10.78%).
• Common Value: $37.79 per share
• Activist Commentary: New Mountain manages non-public fairness, public fairness and credit score capital with combination property below administration totaling greater than $20 billion. It began as a non-public fairness fund however has had a public equities fund for over fourteen years, and manages $1.Eight billion. The agency is key, bottoms up, deep-research traders with a non-public fairness mindset and a long-term view. Their fashion is energetic shareholders who’re very engaged with administration, however more often than not privately. That is New Mountain’s first 13D submitting in seven years.

On June 17, 2020, New Mountain Vantage nominated the next three director nominees for election to Virtusa’s Board on the 2020 Annual Assembly: (i) Michael Baresich, founder and CEO of New York Tech Advisors, L.L.C., which supplies specialised advisory companies to technology-focused firms; (ii) Ramakrishna Prasad Chintamaneni, managing director at New Mountain Capital, L.L.C., the place he leads the agency’s funding initiatives in digital transformation; and (iii) Patricia “Patty” Morrison, former govt vp and chief info officer at Cardinal Well being, Inc., Motorola, Inc. and Workplace Depot, Inc.

New Mountain started investing in Virtusa within the fall of 2019. On April 29, 2020, New Mountain delivered a presentation to the corporate together with a selected path ahead and made a proper request for Board illustration for Chintamaneni and Chad Fauser, two New Mountain workers. On June 12th, the corporate introduced that it could appoint a further unbiased board candidate with IT companies expertise, ignoring New Mountain’s request for a board seat, inflicting New Mountain to escalate its activism publicly with a June 17th letter to the Board.

Within the letter, New Mountain factors out, amongst different issues:

• The corporate’s horrible working margins (declining from 14.3% in 2015 to eight.7% in 2020, 50% under friends)
• Poor annual EPS progress of solely 3% regardless of annual income progress of 22%
• Poor capital allocation selections, particularly the corporate’s acquisition of Polaris.
• Company governance practices that embody a staggered board, co-Chairman/CEO, lack of board range and the lack for shareholders to name a particular assembly or act by written consent.

However extra importantly, all of this has led to a inventory worth that has declined by practically 40% during the last 5 years whereas its related Russell 3000 peer group has delivered an almost 70% return all whereas Virtusa’s CEO’s compensation has grown by 122%. 

Accordingly, on June 22nd, New Mountain introduced its nomination of three director candidates for election to the board on the 2020 Annual Assembly, however is keen to compromise for: (i) Board illustration for both Chad Fauser or Prasad Chintamaneni at Virtusa’s alternative; (ii) the addition of two mutually agreed upon unbiased administrators, certainly one of which might be sourced by Virtusa and one by New Mountain, (iii) formation of a enterprise optimization committee or activity power of the board or the growth of the scope of the present finance committee to incorporate growing an in depth margin enchancment and income diversification plan; and (iv) a dedication to articulate to the market a concrete margin enchancment plan and income diversification technique, along with improved communication to traders, analysts and different market individuals.

New Mountain has nominated two administrators with business expertise and a New Mountain govt who additionally has deep business expertise as an operator at Cognizant. When boards and founders see this, they usually assume somebody is coming for his or her jobs, however that isn’t New Mountain’s fashion. It is a case of an organization that wants higher board oversight that holds administration extra accountable. With contemporary business executives on the board, they’ll work with administration to enhance margins by diversifying income stream, strolling away from low-margin income and higher optimizing and managing the worker base. Furthermore, a rise in digital income may result in a a number of growth from roughly 10 instances the place Virtusa trades at present to over 15 instances the place its closest friends commerce.