Company: Splunk (SPLK)
Business: splunk is a leading provider of application software that collects and analyzes data from digital systems to help companies identify security threats and monitor IT infrastructure. The organization can pull significant amounts of unstructured data from disparate systems and uncover insights that alert IT teams to potential outages or security breaches.
market value: $13.9 billion ($85.67 per share)
Activist: Starboard value
Percentage ownership: almost 5.0%
average cost: n / A
Activist Comment: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiencies and margin improvement. Starboard can also look back on a successful track record in the field of information technology. In 48 previous engagements, it has returned 34.45% versus 13.57% for the S&P 500 over the same period.
In October, Starboard Value announced that it had taken a position in Splunk that is just under 5%.
Starboard views Splunk as an opportunity to own a high quality and stable business at an attractive valuation with the potential to add significant value through a better balance of growth and profitability. Splunk’s software is mission-critical to most businesses and has a very recurring business with approximately 22,000 customers, including 95 of the Fortune 100 companies. Splunk has a leading market share and is considered the “gold standard” in the log management and security market.
In recent years, Splunk has undergone a complex business transformation. The company switched from a perpetual license to a subscription-based model, resulting in negative free cash flow when it transitioned to an annual billing model in 2019. It is nearing the end of this transition. In 2022, it began generating positive free cash flow for the first time since the transition began.
This is a typical Starboard investment — a company with strong revenue growth and an enviable market position that needs help optimizing growth and margins. This often requires a change in management. Well, good news for Starboard and other shareholders: It’s already happening.
In November 2021, CEO Doug Merritt resigned. In March 2022, Splunk announced it would appoint Gary Steele, Proofpoint’s founding CEO, to the helm. Splunk is now looking for a new CFO. Steele has a history of operational execution. In August 2021, Thoma Bravo bought Proofpoint at all-time high prices. Starboard believes there is significant opportunity for the new management team to improve operational performance.
Technology companies like this are generally compared on a growth and profitability metric. Splunk currently has a growth rate of 17% and an operating margin of 11% for a combined score of 28 versus a peer median of 47. Starboard believes Splunk’s operating margin can reach at least 30% (peers are currently at 26%). Revenue growth can exceed 20% (peers are at 21%), which would put it just as high as the peer median. Starboard believes this could double the company’s valuation.
With a new management team, there’s less of a urgency for Starboard to get seats on the board immediately. You will likely work with Splunk as an active shareholder. If they move to the board at short notice, it’s because the company invites them, having seen how valuable Starboard can and has been in such situations. If that doesn’t happen by February 16 – when the shareholder director nomination window opens – and there isn’t a significant improvement in operations, we’ll likely see Starboard making director nominations.
While this is clearly an operational commitment for Starboard, it must be recognized that there is another opportunity here to create shareholder value. When an activist accepts a position with a company, it puts that company in a pseudo-game with potential acquirers who often come from nowhere. It’s quite possible that something like this will happen here. In February, when Splunk had a market cap of $18.4 billion, The Wall Street Journal reported that Cisco had made an over $20 billion bid to acquire the company. You’d think their interest would have picked up a bit since Splunk is now trading with a market cap of $12.7 billion.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.