Starboard takes a stake in Splunk. Right here’s how the activist investor could assist enhance margins

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Firm: Splunk (SPLK)

Activist: Starboard Worth

Share Possession: almost 5.0%

Common Value: n/a

Activist Commentary: Starboard is a really profitable activist investor and has in depth expertise serving to corporations deal with operational effectivity and margin enchancment. Starboard additionally has a profitable monitor document within the info expertise sector. In 48 prior engagements, it has a return of 34.45% versus 13.57% for the S&P 500 over the identical interval.

What’s Occurring?

Behind the Scenes:

Starboard views Splunk as a possibility to personal a top quality and sticky enterprise at a pretty valuation with the potential for vital worth creation via a greater steadiness of development and profitability. Splunk’s software program is mission crucial for many corporations, and it has a extremely recurring enterprise with roughly 22,000 clients, together with 95 of the Fortune 100 corporations. Splunk has a number one market share and is taken into account the “gold commonplace” within the log administration and safety markets.

Over the previous a number of years, Splunk has been present process a fancy enterprise transition. The corporate has been going from a perpetual license to subscription-based mannequin, resulting in unfavourable free money circulation as they transitioned to an annual invoicing mannequin in 2019. It’s close to the tip of this transition. In 2022, it started producing constructive free money circulation for the primary time for the reason that transition started.

It is a typical Starboard funding – an organization with robust top-line development and enviable market place that wants assist with optimizing development and margins. Typically this requires a change in administration. Effectively, excellent news for Starboard and different shareholders: That is already occurring.

In November 2021, CEO Doug Merritt stepped down. In March 2022, Splunk introduced it could appoint Gary Steele, founding CEO of Proofpoint, to the helm. Splunk is now looking for a brand new CFO. Steele has a historical past of operational execution. In August 2021, Thoma Bravo purchased Proofpoint at all-time excessive costs. Starboard believes that there’s vital alternative for the brand new administration workforce to enhance operational efficiency.

Expertise corporations like this are usually in contrast on a development plus profitability metric. Splunk at the moment has a 17% development fee and an 11% working margin, giving it a mixed 28, versus a peer median of 47. Starboard believes that Splunk’s working margins can get to at the very least 30% (friends are at the moment at 26%) and income development can exceed 20% (friends are at 21%), which might put it proper up there with the peer median. Starboard believes that reaching this might double the corporate’s valuation. 

With a brand new administration workforce, it’s not as pressing that Starboard get board seats immediately. They’ll probably work with Splunk as an energetic shareholder. In the event that they do go on the board within the brief time period, it will likely be as a result of the corporate invitations them on after seeing how worthwhile Starboard could be and has been in conditions like this. If this doesn’t occur by Feb. 16 — when the shareholder director nomination window opens — and there’s no marked enchancment in operations, we’ll probably see Starboard make director nominations.

Whereas that is clearly an operational engagement for Starboard, it have to be famous that there’s one other alternative to create shareholder worth right here. When an activist takes a place at an organization, it places that firm in pseudo-play with potential acquirers typically popping out of the woodwork. It’s potential that one thing like that might occur right here. In February, when Splunk had an $18.4 billion market cap, the Wall Avenue Journal reported that Cisco made a $20-plus billion provide to accumulate the corporate. You’d assume that their curiosity degree has piqued a bit of with Splunk now buying and selling at a $12.7 billion market cap.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and he’s the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire can be the creator of the AESG™ funding class, an activist funding type targeted on enhancing ESG practices of portfolio corporations.

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