Elliott Management claims Cognizant is underperforming as it grabs $1.4bn stake
Activist investor throws weight around after taking significant position in IT services outfit
Activist investor Elliott Management has announced it has immediately proposed that Cognizant enact substantial changes after taking a $1.4bn position in the IT consultancy.
The hedge fund, well known for taking large positions in technology companies and pressuring management for policy and structural changes to increase shareholder value, did not deviate from its template with Cognizant, issuing a public, 16-page letter to the board.
In the letter, Elliott requested a meeting with Cognizant's board, while urging the IT services provider to update its board, start paying dividends, increase share buybacks and improve margins to shrink the "profitability gap" between Cognizant and competitors.
"We are writing to you today to outline that opportunity in detail and share our thoughts on how to achieve it," Elliott wrote.
Elliott said it believes that by the end of 2017, Cognizant's stock can be valued up to $90 per share, which would amount to a 70 per cent year-over-year gain.
"In fact, over the last five years, Cognizant has underperformed its core IT services peers by 83 per cent, despite growing revenue at a 22 per cent CAGR versus the peer average growth of a 16 per cent CAGR over the most recent five fiscal years," Elliott argued.
The activist investor criticised Cognizant for "purposely inhibit[ing]" margin growth beyond its current level of 20 per cent and called on the company to begin "prioritising profit margins over absolute revenue gain".
Elliott wants Cognizant to pay shareholders a dividend of 1.5 per cent based on its share price at close on 25 November, return 75 per cent of its annual US free cash flow through share repurchases and buy back $2.5bn in stock by mid-2017.
Cognizant offered that it had engaged in a preliminary discussion with Elliott on Monday ahead of reviewing the letter.
The list of technology companies Elliott has targeted has grown signifcantly, with the most recent inclusion being Samsung. Other companies it has pushed to make management changes or sell-offs include Blue Coat, BMC, Citrix, EMC, Juniper, LifeLock, Mentor Graphics, Mitel, NetApp, Polycom and Riverbed, among others.
Cognizant posted an 8.4 per cent rise in Q3 revenue to $3.45bn, as it boosted GAAP earnings to $0.73 per share from the $0.65 reported in the same period last year.
For the quarter, the company posted GAAP net income of $444.4m, compared to $397.2m in Q3 2015. Non-GAAP diluted EPS was $0.86, compared to $0.76 in the third quarter of 2015.
Earlier this year, Cognizant president Gordon Coburn resigned amid an internal corruption probe over improper payments to an Indian facility.
Cognizant's board subsequently named Rajeev Mehta, a 19-year company veteran, as its new president.
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