Activist Fund Engaged Capital may be turning to a well-known strategy for performance on quotient. to increase

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  • QUOTE

Company: Quotient Technology, Inc. (QUOT)

Shop: Quotient Technology is a digital media and advertising technology company providing high-performance integrated digital media and advertising programs for brands and retailers. The company operates in two segments: (i) Promotions segment, which offers digital coupons, and (ii) Digital Media segment, which provides targeted advertising to customers. The company has developed some of the most valuable customer purchase data insights using industry-leading technology that enables it to work effectively with over 800 consumer packaged goods (CPG) companies and many top retailers.

Market value: $ 689.2 million ($ 7.30 per share)

Activist: committed capital

Percentage ownership: 6.47%

Average cost: $ 6.46

Comment from the activists: Engaged Capital was founded by Glenn W. Welling, a former principal and managing director at 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 is to hold management and board members accountable behind closed doors. Engaged has been investing in quotients since late 2020, taking profits when the stock is up and buying more when it is down.

What’s happening?

On November 17, 2021, Engaged sent a letter to the board of directors highlighting the company’s relative underperformance compared to competitors, poor corporate governance practices and operational issues. In addition, Engaged requested an exemption from the recently announced corporate tax benefit plan that can be exercised if a shareholder purchases over 4.9% of beneficial ownership in order to enable Engaged to acquire beneficial ownership of up to 9.99%. to enable.

Backstage:

This is an industry that is seeing an obvious long-term tailwind as coupons and advertising continue to shift from paper to digital, and e-commerce expands. This tailwind was only strengthened by the Covid environment. However, the company had consistently poor performance – last quarter the company lowered its forecast and reported the loss of one of its largest partners, Albertsons. Over the past four years, the company has consistently missed its quarterly forecasts. As a result, the company has outperformed its peers by over 500% over the past five years, trading near all-time lows, and trailing the S&P 500 by -27.91% in 1-, 3-, and 5-year periods. , -112.25% and -152.87%, respectively.

The problem with quotient is similar to that of many other activist targets: it is a public company that is still run by its founder like a private company with an inflated cost structure and horrific corporate governance. The obvious signs of poor corporate governance are all there – tiered board of directors, combined chairman / CEO, majority vote in uncontested elections, etc. – all things that most companies got rid of years ago. However, the two more obvious examples of an entrenched board are (i) the company introducing a poison pill with 4.9% net operating loss while Engaged buys its position – quotient always had significant NOLs and never had a NOL pill felt but suddenly the need for an instant no shareholder vote while an activist shows up; and (ii) replacing a resigning director with a new director by placing the new director in a class not eligible for election until 2024 and reducing the number of directors available for election that year from three to two . Good corporate governance would require that the new director be elected as soon as possible, especially if that does not involve a change of class. There is no reason for this change than to make it more difficult for shareholders to materially 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 as it has created leadership problems, failed succession planning, and terrible margins. Steve Boal is the company’s founder, chairman / CEO since 1998. Boal stepped down as CEO in 2017 but remained chairman and took the reins back as CEO just two years later, never really giving his successor, Mir Aamir, a fair chance of success . Through all of this, the company is down about 53% from its 2014 IPO price and is aiming for an EBITDA margin of 7 to 8% versus a margin of more than 35% for similar AdTech companies.

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 efficiently for shareholders, or (ii) sell to a strategic investor with a management team that is better can manage this business – it was rumored that there was interest in the company, but management was unwilling to get involved. Neither is a good scenario for Steve Boal.

The question is, how do you tackle these two roles with an eight-person, permanent board of directors with only two directors up for election this year? Well, there is a way, and Engaged has done it before. Engaged in his 2017 activist campaign at Rent-A-Center almost exactly faced the situation – Founder / Chairman / CEO Mark Speese gave up the role of CEO in 2014, kept the role of Chairman and took over the CEO role three years later in the year 2017 Engaged nominated a full roster of three directors to the tiered board that same year, winning the alternate battle and removing three acting directors including chairman / CEO Mark Speese. Six months later, Speese stepped down as CEO.

Interestingly, one of the two seats up for election at Quotient this year is Chairman / CEO Steve Boal. Do you think Engaged will hesitate to follow the Rent-A-Center playbook here? The numbers speak for themselves – during its 4½ year activist campaign at Rent-A-Center, Engaged achieved a return of 238.01% over the same period, versus 85.33% for the S&P 500. It goes without saying that the company Engaged No exemption granted to acquire up to 9.99% of the company’s common stock.

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