Activist fund Engaged Capital may turn to familiar strategy to boost Quotient’s performance


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Company: Quotient Technology, Inc. (QUOT)

Business: Quotient Technology operates as a digital media and promotions technology company that delivers powerful integrated digital media and promotion programs for brands and retailers. The company operates through two segments: (i) the promotions segment, which offers digital coupons and (ii) the digital media segment, which provides targeted advertising to customers. The company has built some of the most valuable insight into customer purchasing data with cutting-edge technology, enabling it to work effectively with more than 800 consumer packaged goods (CPGs) companies and many leading retailers.

Stock market value: $ 689.2 M ($ 7.30 per share)

Activist: Capital engaged

Percentage of ownership: 6.47%

Average cost: $ 6.46

Activist commentary: Engaged Capital was founded by Glenn W. Welling, former Principal and Managing Director of Relational Investors. Engaged is an experienced and successful small-cap investor and makes investments with an investment horizon of two to five years. His style holds management and boards accountable behind closed doors. Engaged has been an investor in Quotient since late 2020, taking profits when the stock has skyrocketed and buying more when it comes down.

What is happening?

On November 17, 2021, Engaged sent a letter to the board highlighting the company’s relative underperformance against its peers, poor corporate governance practices and operational issues. In addition, Engaged requested an exemption from the Company’s recently announced tax benefit preservation plan, which can be exercised if a shareholder acquires beneficial ownership greater than 4.9%, in order to allow Engaged to acquire beneficial ownership. up to 9.99%.

In the wings:

This is an industry experiencing clear secular favorable winds as coupons and advertising continue to move from paper to digital and e-commerce grows. These tailwinds were only amplified by the Covid environment. However, the company has always performed poorly – in the last quarter the company lowered its forecast and reported losing one of its biggest partners, Albertsons. Over the past four years, the company has consistently missed its quarterly targets. As a result, over the past five years, the company has underperformed its peers by more than 500%, is trading near all-time lows, and has underperformed the S&P 500 over periods of 1, 3 and 5 years. of -27.91%. , -112.25% and -152.87%, respectively.

The problem with Quotient is similar to that of many other militant targets: It is a public company still run by its founder as a private company with an inflated cost structure and appalling corporate governance. The obvious signs of poor corporate governance are all there – staggered board of directors, combined president / CEO, plurality voting in uncontested elections, etc. – all things that most companies did away with years ago. However, the two most egregious examples of an entrenched board are (i) the company instituting a 4.9% net operating loss poison pill just as Engaged buys its position – Quotient has always had important NOLs and has never had a NOL pill, but suddenly feels the need for an immediately without a shareholder vote at the same time an activist shows up; and (ii) replace a resigning director with a new director by placing the new director in a category that is not up for election before 2024 and reducing the number of directors elected this year from three to two. Good corporate governance would require that the new director be elected as soon as possible, in particular if this does not imply a change of class. This change has no other reason than to make it more difficult for shareholders to significantly change the composition of the board of directors.

This poor corporate governance is not just an academic problem – it is a practical problem for shareholders because it has led to a leadership problem, a failed succession plan and horrendous margins. Steve Boal is the founder, president / CEO of the company and has been since 1998. Boal stepped down as CEO in 2017, but remained chairman and took over as CEO two years later, never really give his replacement, Mir Aamir, a good chance of success. Thanks to all this, the company is down about 53% from its IPO price in 2014 and guides EBITDA margins from 7% to 8% vs. 35% + margins for AdTech companies. similar.

There are two options here to create shareholder value: (i) bring in a new management team with extensive digital advertising experience to run the business more effectively for shareholders, or (ii) sell to a strategic investor with a management team that can better manage this business – it was said that there had been interest in the business, but management was unwilling to commit. Either is not a good scenario for Steve Boal.

The question is, how do you accomplish either of these tasks with an eight-person board of directors with just two directors running for election this year? Well, there is a way, and Engaged already has it. Engaged faced almost the exact situation in his 2017 campaign activist at Rent-A-Center – Founder / Chairman / CEO Mark Speese stepped down as CEO in 2014, retained the role of Chairman and returned to the role CEO three years later in 2017 Engaged appointed a full roster of three directors to the staggered board of directors that same year, won the proxy battle and removed three titular directors, including chief executive officer Mark Speese. Six months later, Speese stepped down as CEO.

Interestingly, of the two seats up for Quotient this year, one of them is CEO Steve Boal. Do you think Engaged will hesitate to follow the Rent-A-Center playbook here? The numbers speak for themselves: During its 4.5-year activist campaign at Rent-A-Center, Engaged returned 238.01% vs. 85.33% for the S&P 500 over the same period . That said, it goes without saying that there is no way the company will grant Engaged an exemption to acquire up to 9.99% of the company’s common stock.

Ken Squire is the founder and chairman of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. .


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