Acxiom Transforms, Performs

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Looking back from several years in the future, 2006 might be remembered as the year Acxiom turned the corner.
The Little Rock information management company certainly has taken its share of licks during the past six years. Just to list a few, Acxiom has had to contend with an economic slowdown, costly technology investments, acquisitions that failed to meet initial expectations, two major security breaches (the second of which prosecutors said was the biggest data heist ever) and a painful transformation that led to both layoffs and voluntary turnover.
To top that off, last year Acxiom was fighting a hostile takeover by its largest institutional shareholder, ValueAct Capital Partners. The San Francisco hedge fund, led by founding partner Jeff Ubben, first offered in July 2005 to purchase all outstanding Acxiom stock for $23 a share. Three months later, it upped the price to $25 a share. But Acxiom's board of directors refused, leading ValueAct to step up the criticism of the company's management, particularly Company Leader Charles Morgan.
With all this whirling around as the company headed into 2006, Acxiom delivered four quarters of solid financials, the last of which was heralded as the company's best first quarter ever.
Analysts like Kevane Wong of JMP Securities believe Acxiom could now see the light at the end of the tunnel. Citing Acxiom's repositioning of itself as a business and data consulting company rather than a technology outsourcing company, Wong initiated JMP coverage of Acxiom in June with a "market outperform" rating. Wong later downgraded Acxiom to "market perform" following lackluster U.S. earnings amid toughening industry conditions.
"I think as far as internal issues, they have mostly waded through this stuff. As far as the macro-environment, things have gotten a little more difficult," Wong said.
More to the point, Acxiom's performance leading up to the annual shareholders meeting took the steam out of ValueAct's takeover bid just as investors were set to vote on whether to replace Morgan and two other long-serving directors with Ubben and two more ValueAct nominees.
In August, Acxiom and ValueAct finally reached an agreement that ended the proxy fight. After all was done, Ubben got exactly what he originally had set out to get: a seat on Acxiom's board and a chance to influence the direction of the company. In return, Morgan regained the faith of ValueAct and Acxiom's other shareholders.
And Acxiom emerged as a more fiscally responsible company poised to take advantage of growth opportunities.
Still in the Driver's Seat
Despite all the changes, one thing is undeniably the same: Charles Morgan is still in the driver's seat, exactly where he has been for the past 31 years.
Seemingly unfazed by Acxiom's recent hard times, Morgan attributed the rough patch to the normal ups and downs in his industry, a cycle that he said Acxiom experiences about every 10 years.
Morgan cited a time during the mid-1970s when employees were on half-salary and the company wasn't sure it would make payroll or even survive.
In the early 1990s, Acxiom had to contend with postal rate increases, the economic impact of the first Gulf War and a big bank customer that dramatically curtailed its marketing.
"Then we were $100 million, and now we are over $1 billion. So we recovered and went on, and that is what we expect to do this time," Morgan said.
Acxiom's most recent difficulties started in late 2000. After peaking at $44 dollars a share, Acxiom's stock began to drop following the bankruptcy of a big client, Montgomery Ward. Shares hit the rock-bottom price of $7.95 soon after the terrorist attacks on Sept 11, 2001.
It didn't help when Acxiom was the victim of two major security breaches in 2003. The second and most egregious was perpetrated by Scott Levine, owner of Snipermail.com, who in February was sentenced to eight years in prison and fined $12,300.
Morgan said Acxiom has since dramatically increased its data security.
"We thought we were top-drawer in that area, and I think we were probably blissfully ignorant. We thought it would never happen to us, and once it did, we really went back and started examining in great detail all of our process and procedures," Morgan said.
Far from an isolated incident, Acxiom's data breaches were part of a string of identity theft cases detailed in news accounts across the country. Morgan said the incidents set off alarms that businesses needed to greatly improve data security.
Morgan said Acxiom supported the passage of more federal data security legislation that would pre-empt the current patchwork of state laws. What businesses like Acxiom need, he said, are clear standards about such issues as when to notify consumers of breaches.
"I think the concept that we certainly support is if the data was taken but there was no reasonable expectation that harm would come to any consumer, is it really helping them by notifying them that, for example, their data was taken but no harm came to them?"
New Sales Mindset
Wong said that he had heard from clients that Acxiom was finally changing its approach to selling its services.
Traditionally, Acxiom had positioned itself as a technology outsourcing company rather than a services company. The difference between the two, Wong said, is the difference between trying to sell a tool and trying to sell the "business solution" that the tool can deliver.
Said Wong: "I have talked to customers who said, 'Look, when these guys came in, they were trying to sell this stuff to me [through] a technology sales approach.' And the customer basically said, 'Geez, this is nifty that you have this technology, but this is what I really need.... What I need is something that can help me make my decisions quicker. What I need is a way to make sense of all this data that I have and how to put it in a format that will allow me to take action.'"
The shift in the mindset has been central to Acxiom's transformation, which included an internal reorganization, moving the company away from a structure based on self-contained business units devoted to each client to a structure that groups together employees performing the same or similar functions.
As part of the reorganization, Acxiom laid off over 5 percent of its work force in March 2004. Barely a year later, the company cut another 4 percent of its jobs to further tighten annual expenses to the tune of $60 million.
But while Morgan acknowledged the change in the sales approach and its benefits, he hasn't completely abandoned Acxiom's technology roots.
Investing and implementing Acxiom's new grid computer technology during the past five years has been the other half of the company's recent transformation.
Acxiom's grid computing technology connects several computers together to quickly and cheaply process data, delivering better performance at a lower cost. Although it was criticized by ValueAct and others as a waste of capital, Morgan said the investment in technology was vital for the company's future growth.
"Our challenge is getting our technology hooked up to enough applications within an enterprise. It's hard for us as a hosted services business. We can't have all the computers in the world. We have got acres and acres of computers. We need to start putting computers in our customers' centers that we manage and provide services for," Morgan said.
In January, Acxiom announced a partnership with EMC Corp. of Hopkinton, Mass., which will sell the grid technology. Morgan said the product would not go to market until January 2008, though he also mentioned that on Dec. 18 he had been on a sales call with representatives of EMC and a potential client in London.
In the meantime, Acxiom launched in December a campaign to enhance its evolving corporate identity around the globe. The company, described in a 2004 Frontline documentary as "one of the biggest companies you never heard of," wants people to know who they are and what they do. The rebranding effort centers on the distinctive "x" in the Acxiom logo and the company's new tagline: "We make information intelligent."
Friends in the End
Morgan said he always figured the ValueAct proxy fight would be settled.
"There was a problem with either side winning, and Jeff said it to me in probably the clearest terms. He said, 'You know, I kept wondering what I was going to do with myself and my two directors walking into a hostile board room. What was I going to accomplish?'''
Beneath all of the tit-for-tat criticisms that played out in the media, Morgan said, he and Ubben had some genuine disagreements.
Ubben began discussions with the Acxiom board in December 2003, bring-ing recommendations such as improving the way Acxiom communicated its financial objectives to investors, controlling capital spending, hiring a chief financial officer and creating a finance committee under the board of directors.
Some of those concerns, Morgan said, were already being addressed by the board. Before meeting with Ubben, Morgan also said, Acxiom already was looking internally for a replacement for its last full-time CFO, Jeff Stalnaker, who was promoted to lead the company's financial services division two years ago. In the interim, Rodger Kline took over the CFO responsibilities as part of his move into the role of "chief finance and administration leader." In May, the company hired Frank Cotroneo, formerly the CFO for H&R Block.
Morgan did, however, take up Ubben's recommendation to publish a "financial road map" with quarterly earnings reports in lieu of the former quarter-by-quarter guidance. Acxiom also eventually redefined the way it reported free cash flow on the road map, a step toward the financial transparency that Ubben wanted to see.