Company: Vertiv Holdings (VRT)
Business: vertical designs, manufactures, and services critical digital infrastructure technologies and lifecycle services for data centers, communications networks, and commercial and industrial environments. The Company went public in the first quarter of 2020 through a SPAC merger with GS Acquisition Holdings, a SPAC co-sponsored by a subsidiary of Goldman Sachs Group and David M. Cote, CEO of GSAH and former Chairman and CEO by Honeywell. Cote currently serves as Executive Chairman of Vertiv.
market value: $5.6 billion ($14.96 per share)
Activist: Starboard value
Percentage ownership: 7.38%
average cost: $11.21
Activist Comment: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiencies and margin improvement. Starboard has filed 107 previous 13D filings and has an average return of 26.35% versus 10.82% for the S&P 500 over the same period. Only 10 of those 13D filings involved companies in the industrials sector, but for those 10 13Ds, Starboard has returned 52.55% versus 1.14% for the S&P 500 over the same period.
What’s happening?
Starboard bought a 7.38% position for investment purposes.
Backstage
Starboard sees Vertiv as a great company in a solid industry with a sustained tailwind – more data is being generated every day, requiring more data centers. It’s also reasonably recession-proof – consumers need to cool their data centers even in recessionary environments. Vertiv is a market leader in data center equipment and services and has leading market positions in thermal and services critical to compute-intensive and hyperscale data centers.
Vertiv is a collection of companies assembled by Emerson Power over many years and rebranded as Vertiv and sold to Platinum Equity in 2016 for $4 billion. Platinum Equity had a 5 year plan to fix the company and either take it public or sell it to a strategic buyer. However, during this time SPAC mania hit the markets and Platinum Equity took advantage by taking it public via a SPAC in the first quarter of 2020 for an enterprise value of $5 billion.
Following the IPO, Vertiv delivered solid results that allowed management to continue to focus on revenue growth rather than operating margins. As inflation began to rise and costs rose, the company’s competitors raised prices, but Vertiv did not. That caused the company to fall sharply short of earnings expectations in the fourth quarter of 2021, with the stock falling almost 37% in one day. At that point, Platinum Equity had sold its position from 36% to 10.8%. Perhaps best of the SPAC transaction is that former Honeywell Chairman and CEO Dave Cote was named Executive Chairman of Vertiv and has now promised shareholders increased ownership and full oversight of the company’s operations.
Cote has a well-established reputation as a great operator that focuses on operational efficiencies and margins rather than growth. As CEO of Honeywell, he has created significant value where he transformed margins and is a proven operator. CEO Rob Johnson focused on growth rather than operational execution, resulting in an 8% to 9% operating margin versus peers like Schneider Electric and Eaton Corp. led with 20%. On October 3, Vertiv announced that Johnson would step down as CEO effective December 31 and be replaced by Giordano Albertazzi, who currently serves as the company’s President, Americas. This is obviously a decision by a board chaired by Cote, and we would expect Albertazzi, like Cote, to be more focused on operational efficiencies.
This is a typical situation for Starboard: A private company CEO runs a public company like a private company, resulting in subpar operating margins. In a case like this in the past, Starboard came in, got board seats, and helped find the right CEO to focus on operations, with the company providing board-level support and oversight to management. But much of that has already been done here: the underperforming CEO has been removed, a more operationally-focused CEO has been appointed, and there is an all-star chairman at the helm — exactly the kind of chairman Starboard has hoped to appoint in the past. Accordingly, we do not expect this to be a confrontational engagement for Starboard.
Both Starboard and Vertiv appear to be on the same page. That being said, we would expect Starboard to want some level of board representation to oversee margin improvements, and if management is familiar with Starboard’s history, they should welcome them to the board. Starboard is likely to work constructively with management to close the margin gap, either as an active shareholder or as a director appointed to the board. If Vertiv doesn’t extend an invitation and operating margins don’t look like they’re headed in the right direction through March 2023, when the director nomination window closes, we can see Starboard making nominations, but we don’t expect it to comes to that.
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 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.
