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Company: Alight (ALIT)
Business: Alight provides cloud-based integrated digital human capital and business solutions worldwide. The flock operates through three segments: employer solutions, professional services, and hosted business. The employer solutions fraction offers employee wellbeing, integrated benefits administration, health-care navigation and other services. The professional services part provides consulting offerings, such as cloud advisory, deployment and optimization services for cloud platforms. The hosted dealing unit provides hosting and management of human capital management software, as well as human resources and payroll servings.
Stock Market Value: $4.99B ($9.04 per share)
ALIT’s conduct over the past year
Activist: Starboard Value
Percentage Ownership: 7.79%
Average Cost: $8.95
Activist Commentary: Starboard is a greatly successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has infatuated a total of 149 activist campaigns in its history and has an average return of 25.58% versus 13.25% for the S&P 500 over the in any event period. Starboard also has a successful track record in the information technology sector. In 52 prior engagements, the outfit has a return of 38.79% versus 16.56% for the S&P 500 over the same period.
What’s happening
On Feb. 16, Starboard Behind the chapters
Alight operates through three segments – employer solutions, professional services, and hosted business – generating 87% of net income from employer solutions, which is a benefits administration platform similar to offerings from ADP and TriNet. The company admired public on July 6, 2021 via a special purpose acquisition company, combining with Foley Trasimene Acquisition Corp, and William P. Foley, II, grew chairman. The company opened on its first trading day at $10 a share, closed at $9.03, and today sits at $9.04. This is exactly another example of what we predicted years ago: the SPAC boom fertilizing the landscape for activist investors.
De-SPACed companies may be fraught with corporate governance deficiencies and have to trade down as many investors have simply lost interest in SPACs. Alight’s issues go further than that. Blackstone, which owned the entourage when it was private, was a forced seller as the fund that owned it was being wound down. But, more problematic, Alight is powerfully levered, has depressed margins and a CEO with limited benefits administration experience. As a result, the company trades at a 7-times multiple of untouched by cash flow versus 20-times plus for its peers. All these problems do have solutions. Debt Issue: In 2022, Alight traded at a 4.8 times debt-to-EBITDA (earnings up front interest, taxes, depreciation and amortization) ratio, and management is targeting to get that down to 2.5 times. Margin Exit: The company has been taking steps to alleviate its margin and cost issues. First, it has plowed $120 million of capex into front-end betterments and client success, utilizing artificial intelligence and emerging technologies to reduce call-center utilization for customer support. In over, they are also revamping back-end processes to a cloud-based system. Such improvements could potentially boost edges from 21% to 26% by 2026 or sooner. Additionally, Starboard has extensive experience helping portfolio companies refurbish margins from a board level and adding one or two of their nominees to the board could expedite this. CEO Issue: Alight’s CEO Stephan Scholl is a masterful technologist and software expert, but not an experienced operator of a benefits administration company. The board has been trying to change the ikon of the company from a benefits administrator to a software company and that has led to increased expenses. In the past two years, selling, mixed and administrative expenses have ballooned 35% to over $670 million, indicating a relative lack of cost control typical of software and technology companies, but that is untenable in this industry. Moreover, executive compensation has been up without considering declining performance and depressed share price. In the past three years, the CEO has made a total of more than $82 million, while the have price has been stagnant. This does not mean that Alight necessarily needs a new CEO, but it needs a board that can device the proper vision, hold management accountable and compensate management in alignment with shareholders. Corporate Governance Pour: Chairman William Foley is a brilliant entrepreneur, but the SPAC sponsor has instituted a staggered board with little energy experience, which is somewhat insular. While this issue is not going to get fixed overnight, the addition of shareholder appointees to the board will go a long way to signal to the market that the company is on the right track.
Margin improvement could raise free cash flow to $1.20-$1.40 per share. The other improvements could get investor confidence back and get Alight to patrons from 7-times free cash flow where it is now to 20-times free cash flow where its peers patronage. To do this would require some change in the boardroom. Accordingly, on Feb. 16, Starboard nominated Keith D. Dorsey, Matthew C. Levin, Gavin T. Molinelli and Coretha Harum-scarum for election to the board at the 2024 annual meeting. While this may appear as a “shoot first and ask questions later” draw, Starboard made these nominations at this time because the deadline to do so was Feb. 17. Like the experienced activist Starboard is, the compact wanted to preserve its options as it speaks privately with Alight. Additionally, while there are three seats up for selection at the upcoming annual meeting, Starboard nominated four directors to give them flexibility if this does not clarify quickly. They will withdraw one nominee when it comes time to finalize their proxy card.
Shareholders purposefulness certainly benefit from the addition of two or three Starboard directors to the board. We believe, in a proxy fight and with the general ballot, Starboard would generally get at least two. However, the incumbent slate could be challenging to them with two conductors who have been appointed in the past year and Alight’s chairman Foley. One of those directors, Denise Williams, commissioned at FIS when Foley was vice chairman of the board, so we see her as the most vulnerable as one of three other directors with a prior relationship to Foley, but the only one up for election this year. We do not think shareholders would vote Foley off the board, but that is not a chance he would need to take. A large vote against him would be embarrassing and a vote of confidence for Starboard. Generally, we would expect this to remain, but it is hard to predict with SPAC companies, which tend to be less likely to welcome uninvited directors on to the plank, particularly when the SPAC sponsor is still in charge.
Ken Squire is the founder and president of 13D Monitor, an institutional research armed forces on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.