by Chip Taulbee on Monday, Oct. 31, 2005 12:00 am
Last week marked the first time ValueAct's managing partner, Jeffrey Ubben, publicly said his San Francisco investment firm did not necessarily have to acquire Acxiom but would be satisfied with a change in strategy and a change in management at the data company.
Ubben told Arkansas Business that the reason ValueAct persists with a takeover attempt is because Acxiom has not been receptive to its largest shareholder. ValueAct owns 11.75 percent of Acxiom's stock.
"We talked to them about board representation to help them work through their weaknesses, but they put in a policy that said no large shareholder would ever serve on this board, which confounded us," Ubben said. "And to a certain extent there's no other choice than to make a controlled bid to affect the management change because the board's not going to do it for themselves."
A change in management would almost surely target Morgan, whose management Ubben describes as unfocused and ineffective.
"If you read their annual reports over the last six years, every year or two there's some sort of technology revolution that Charles is pursuing, talking about new paradigms and at the same time he's also restructuring the work force," Ubben said. "So he's always somehow reinventing this company and at the same time doing a drip, drip restructuring - firing people and then hiring people then firing people - and that creates a track record...of inconsistencies and a poorly performing stock."
In July, Acxiom announced a 4 percent cut of its global work force, or 250 employees, on the eve of the company's poor first quarter earnings report.
In April 2004 the company an-nounced 230 employees would be let go in an "organizational realignment."
In 2001 the company cut salaries by 5 percent and, when that did not fix the numbers, laid off 380 workers. And in August 1999 Acxiom axed its 250 "lowest contributors."
Morgan declined Arkansas Business' request for an interview, and the company would not directly address ValueAct's criticisms.
In a press release Morgan said, "Acxiom senior management strongly disagrees with ValueAct's analysis of our business, and we believe the results of this last quarter and the continuing progress we are making are evidence that we are moving in the right long-term direction."
Morgan also told Acxiom employees last week in an e-mail leaked to the press that the company was "under attack."
But some analysts believe there is truth to ValueAct's sour appraisal of Acxiom's management.
In a document filed with the Securities & Exchange Commission on Oct. 21, Ubben renewed his criticism of Acxiom's top brass and increased ValueAct's offer to buy all shares of Acxiom it does not already own to $25 a share, a 25 percent premium on the stock's last closing price before the offer.
ValueAct, which has publicly pursued an Acxiom takeover since June, also said in the recent filing it was prepared to go even higher than its current $2 billion offer.
The hedge fund accused Acxiom of misstating its free cash flow and wants the company to de-emphasize its IT outsourcing business, which has lower profit margins than Acxiom's other core businesses.
"While management trumpets top-line growth and pro forma profits, the significant decline in true free cash flows tells a dramatically different story," Ubben said in the filing.
Indeed, Barron's Online reported last week that Glenn Greene, analyst at ThinkEquity Partners, believed Acxiom's free cash flow yield of about 3.6 percent was not attractive.
ValueAct also claims Acxiom overstated its free cash flow by not including costs of acquiring capital assets and software licenses.
Ubben said, "Acxiom's purported 'free cash flow' calculation materially understates the cash obligations that the current management team is imposing on the company and, ultimately, its shareholders, to fund its misguided and costly capital expenditures."
Two of the capital expenditures Ubben referred to are last year's acquisition of two of Europe's largest data companies, Claritas Europe from VNU N.V. of Haarlem, The Netherlands, and Consodata from Seat P.G., which has operations in England, France and Spain.
The two companies cost Acxiom a total of $76.4 million but have done little for its international business thus far.
In August, at Acxiom's annual shareholders meeting, Chief Operations Leader Lee Hodges said Acxiom should have anticipated the complexities of merging with Claritas Europe and Consodata. But Acxiom said last week in an earnings conference call that it was optimistic about the performance of its European business this quarter, which is typically strong in that market.
Ubben also criticized Acxiom's management for emphasizing its IT management segment, which does not produce the same margins as the company's services and data segment.
"The company won another large, highly capital intensive outsourcing contract in a head-to-head competition with IBM," Ubben said in the filing. "Should we believe that Acxiom has a lower cost of capital than IBM? Or that Acxiom is more efficient than IBM? Does anyone really believe that it is a sound long-term strategy to attempt to compete with IBM in the outsourcing business?"
An analyst who spoke on the condition of anonymity said he believed the cost structure of Acxiom's IT management business is higher than it ought to be. He also opined that the company is not as competitive as it should be in that segment, which accounts for about a quarter of Acxiom's revenue.
In September Acxiom trumpeted a large IT outsourcing contract with NDCHealth Corp. of Atlanta.
Acxiom has indicated in the leaked memo and a recent conference call that it is committed to its IT outsourcing business.
"Overall outsourcing continues to provide an important financial balance to our business," said Lee Hodges in an Oct. 19 conference call following the company's recent earnings report. "While returns on invested capital are slightly lower than other data and services business, in recent quarters return on sales has actually been slightly higher for our outsourcing business."
In the same conference call, Acxiom was pressed about the profit margin on its IT outsourcing business. The company remained mum on an actual figure, although Hodges said Acxiom was "looking at double-digit margins" in that segment.
In the leaked e-mail memo leaked to the press last week, Morgan warned employees of impending changes in the company's outsourcing business if ValueAct takes over.
"ValueAct doesn't think outsourcing is a business we should be pursing," Morgan said in his e-mail to employees. "We, however, remain strongly committed to our outsourcing business, which with our move into 'data factory' outsourcing is even more strategic for us than ever - and are convinced it represents a major growth opportunity."
If ValueAct is able to leverage its hostile takeover attempt into a change in management at Acxiom, it would not be the first time. Last December, ValueAct got MSC Software of Santa Ana, Calif., to give it two board seats in lieu of a continued takeover attempt. By February, one of ValueAct's board members was CEO of the company.
On Oct. 4 ValueAct countered Acxiom's previous claims that the investment firm lacked the expertise to manage a data company by proposing that three industry veterans run the company.
Under ValueAct's plan, Lou Andreozzi, former president and CEO of LexisNexis' legal research division, would replace Charles Morgan as Acxiom's chief executive if ValueAct successfully acquired Acxiom.
Otherwise, Andreozzi; Michael Lawrie, former CEO of Siebel Systems Inc.; and Michael Wood, former chief financial officer of Worldspan LP, will compete for open seats on Acxiom's board of directors in next year's election, ValueAct said.
Those seats are now held by Mor-gan, former U.S. Postmaster General William Henderson and Ann Die Hasselmo, former president of Hendrix College in Conway.
Despite Ubbens' and some analysts' criticisms, ValueAct's new offer does not yet appear to be enough to complete a takeover.
Bob Williams, senior vice president and managing director of Delta Trust Investments Inc. in Little Rock, said that usually when investors believe a takeover is imminent, the stock's price jumps to within 10 percent of the takeover offer.
As late as Thursday, Acxiom's stock had not traded within that range all week.
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