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Shares of Commvault Systems Inc. jumped 10 percent today following a disclosure by Elliott Management Corp. that it has taken a 10.3 percent stake in the data protection giant.
In conjunction with the announcement, the activist hedge fund released a public letter calling for a set of sweeping organizational and leadership changes. Elliott Management has a long track record of successfully pushing for major changes at publicly traded tech firms.
The fund is particularly well-known for pressuring companies to seek a buyout, a possibility that its letter didn’t mention in the context of Commvault. However, Reuters pointed out that two of Elliot’s four board nominees have ties to private equity firms.
The biggest item is a proposal to nominate four new directors to the 11-person Commvault board who would back the implementation of the measures. In the letter, Elliot said changes are needed to address what it perceives as lackluster stock market performance by the data protection provider.
The hedge fund blamed the situation in no small part on Commvault’s profit margin, which has dropped from 23 percent to 10 percent over the past five years. Elliot also pointed out that the company has failed to meet its goal of achieving $1 billion in annual revenue during the 2018 fiscal year.
The fund argued that what Commvault needs is a “full change, which often requires talent in the form of executives who have seen these issues before and who bring fresh perspectives.” Elliot also proposed that the company hire a consulting firm to conduct an operational review designed to reduce expenses, as well as find ways to boost growth.
“We believe Commvault has the ability to achieve its long-standing mid-20s operating margin target within the next three years,” the letter said. “The cost-structure initiatives that we have identified include de-layering of management positions, re-organizing spans of control and comprehensively re-evaluating the go-to-market model.”
Lastly, Elliott is pushing for Commvault to implement an expanded stock repurchase program. The fund’s argument for why the company should distribute its nearly $450 million cash reserve to shareholders consists of several points. One of them is that the data protection provider hasn’t made any acquisitions in its 22-year history.
However, Commvault itself may well end up getting acquired. “Looking at comparable take-out multiples in the software space by financial buyers [such as TIBCO Software Inc., Marketo Inc., Qlik Technologies Inc. and Xactly Corp.], we think a potential transaction could occur in the mid- to high-$60s based on current forecasts,” Mizuho Financial Group tech analyst Abhey Lamba wrote in a note to clients today. After this morning’s stock rise, Commvault’s shares were trading at about $63 a share.
Commvault, for its part, is approaching the proposed changes with an open mind. The company said in an official response to Elliot’s letter that “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.”
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