Elliott Unveils $1.4 Billion Stake in Cognizant, Seeks Talks

By Pino Vallejo

Elliott Management Corp. unveiled a $1.4 billion stake in Cognizant Technology Solutions Corp. and is seeking a meeting with directors to discuss proposals that it argues could boost the company’s value.

Elliott, led by billionaire Paul Singer, owns about 4 percent of Cognizant’s shares, the firm said in a public letter to the board Monday. The information-technology company should refresh its board, begin paying dividends, increase share buybacks and improve margins to reduce the “profitability gap between Cognizant and its peers,” Elliott wrote.

“We look forward to a collaborative and positive dialogue with Cognizant’s board and management,” Jesse Cohn, Elliott’s head of U.S. activism and senior portfolio manager, wrote in the 16-page letter. “To that end, we respectfully request a meeting in the next few weeks with the full board” to discuss the proposals.

Cognizant said it had an “introductory discussion” with Elliott on Monday, without specifying who was involved, and said it plans to respond after carefully reviewing the letter.

“Cognizant welcomes open communications with all of its shareholders and values their input,” the company said in a statement. “The Cognizant board of directors and management team regularly review the company’s strategic priorities and opportunities towards the goal of enhancing value for all shareholders.”

Shares of Cognizant rose as much as 9.9 percent Monday, the biggest intraday gain since May 2015, to $58.50, valuing the Teaneck, New Jersey-based company at about $35 billion. Elliott said its proposals can boost the company’s value to $80 to $90 a share by the end of 2017.

Margin Improvement

Cognizant could reach 23 percent in operating margins in 2018 without making any cuts by using resources more efficiently and growing expenses more slowly over the next two years, Elliott said. For the past 20 years, the IT services provider has followed a strategy of keeping operating margins at 19 percent to 20 percent. The company can increase buybacks and commit to paying dividends using existing cash and future cash flows, according to Elliott.

Under Cohn, Elliott has typically focused on technology companies. Recent campaigns have targeted EMC Corp., Citrix Systems Inc., CDK Global Inc., Mitel Networks Corp., NetApp Inc. and Juniper Networks Inc. The hedge fund also recently targeted Samsung Electronics Co. with proposals to overhaul its corporate structure.

Cohn often targets technology companies it agitates to be sold, including EMC, Mentor Graphics Corp., LifeLock Inc., Qlik Technologies Inc., Polycom Inc., Informatica Corp., Riverbed Technology Inc., BMC Software Inc., Compuware Corp., Novell Inc. and Blue Coat Systems Inc., among others.

At $1.4 billion, the Cognizant stake is among the activist’s biggest initial equity investments, surpassing original disclosures in key targets such as Samsung, Citrix and Hess Corp.

While it was the fastest growing IT services provider in the past few years, Cognizant has been reporting slowing sales growth this year. In 2016, clients in its two major sectors — health care and financial services — pulled back on spending due to consolidation and volatility from macro-economic events. At the same time, the entire industry has been shifting to more digital and cloud-based operations, as demand for traditional services shrinks.

Applying Pressure

Elliott’s push to shake up Cognizant’s board will probably benefit shareholders, providing pressure on the company to either return to double-digit growth or start returning capital, said Bloomberg Intelligence analyst Anurag Rana. Investors would be pleased without a dividend or share repurchases, he said, if the company can show results from investing more money back into the business.

“Elliott’s arguments are absolutely right if this is a company growing at 7 to 8 percent every year,” said Rana. “If the company grows again another 10 to 15 percent, if you’re able to show top-line growth at that rate, nobody cares, frankly, about the margins.”

Kerrisdale Capital, a New York-based hedge fund that owns shares of Cognizant, said on Twitter that Elliott’s letter was “excellent” and that improved margins and capital allocation would increase the value that shareholders assign to earnings. Cognizant has followed outdated policies and been slow to adapt to its competitive landscape, Sahm Adrangi, Kerrisdale’s chief investment officer, said by e-mail.

In a note to clients Monday, BMO Capital Markets analyst Keith Bachman said Cognizant’s entrenched leadership could use help to implement new strategies and should adopt dividend and buyback plans.

Cognizant this year disclosed an internal investigation into payments relating to permits for some facilities in India and whether those payments were possibly made in violation of the U.S. Foreign Corrupt Practices Act. In the third quarter, Cognizant said some members of senior management have been aware of or participated in these matters. The company has identified about $5 million in improper payments so far and is cooperating with regulators on the investigation.