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JANA wins two seats on the board of software company New Relic. This is what may be ahead

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Company: New Relic (NEWR)

Activist: JANA Partners

Percentage of ownership: 4.9%

Average cost: n / A

Activist Comment: JANA is a highly experienced activist investor, founded in 2001 by Barry Rosenstein. The company has made a name for itself by taking deeply researched activist positions with well-laid plans for long-term value. Rosenstein called his activist strategy “V cubed”. The three “Vs” were (i) value: buy at the right price; (ii) votes: knowing if you have the votes before you start a proxy contest; and (iii) a variety of ways to earn: having more than one strategy for increasing value and exiting an investment. It worked well for them until 2008 when the 19 13Ds they filed had an average holding period of 23 months and an average return of 39.4% compared to 9.9% for the S&P 500 during those periods of detention. Since 2008, they have gradually moved this strategy towards what we characterize as the three “S”s (i) stock prices – buy at the right price; (ii) strategic activism – sale of business or spin-off; and (iii) star advisors/nominees – aligning themselves with key industry leaders to advise them and if necessary sit on the board. Since 2008, their average holding period with this philosophy has been around nine months, but also relatively successful – with an average return of 16.2% versus 9.4% for the S&P 500 over the average holding period of nine month.

What is happening?

On June 6, JANA and the company have entered into a cooperation agreement, under which the company has agreed to accept the resignation of current directors Adam Messinger, Dan Scholnick and Jim Tolonen from the board of directors and to appoint Kevin Galligan (partner and director of JANA Strategic Investments Research) and Susan D. Arthur (CEO of CareerBuilder) as Board Directors. JANA has agreed to withdraw its May 20 Notice of Nomination as Director and to abide by certain customary standstill provisions.

In the wings

JANA isn’t the first activist to get involved with New Relic. Last summer, Engaged Capital and New Relic entered into an unusual agreement, under which Radhakrishnan (“RK”) Mahendran, a partner at HMI Capital, the company’s largest shareholder, was appointed to the board of directors as director for a term expiring in 2023. annual meeting. In October 2021, Engaged released a presentation outlining its belief that the company’s underperformance was due to issues with its technology and product strategy, product shortcomings in key areas, direction customer and management gaps/high turnover. They felt that many of these historic issues had been resolved, including a new CEO and management team, and that turnaround efforts were beginning to show progress. However, New Relic was still trading at a significant discount to its peers – 6x EV/Revenue versus 20x and 37.5x for peers Dynatrace and Datadog, respectively. Committed’s plan did not go as they had hoped, with a decline of 23.30% since the date of their settlement compared to -4.84% for the S&P 500 over the same period. This has clearly caught the attention of JANA, which will be in a much better position to create shareholder value with one of its own board partners.

JANA settled for two board seats here, one for Kevin Galligan, partner and director of research at JANA Strategic Investments, and one for Susan D. Arthur, CEO of CareerBuilder. This is in line with JANA’s activist strategy – buy at a good price where there is an opportunity for strategic activism and operational activism in conjunction with a director with industry or operational experience. Arthur and Galligan’s presence on the board adds representatives to the board with both operational and financial/strategic experience to provide the most flexibility in choosing the path that creates the most value. for shareholders. JANA has recent experience in both of these areas in the tech industry – their most recent campaigns in the industry are Zendesk, where they successfully opposed the ZEN/MNTV merger and are now seeking board seats. ; and Vonage and Perspecta, where they successfully argued for the sale of the business in both cases.

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 activist investments 13D. Squire is also the creator of the AESG™ investment category, an activist style of investing focused on improving the ESG practices of portfolio companies.