Company: Pitney Bowes (PBI)
Business: Pitney Bowes is a global shipping and mail company that provides technology, logistics and financial services to businesses, including more than 90% of the Fortune 500, retailers and government customers around the world. It operates through three business segments: (i) Global E-Commerce, (ii) Presort Services, and (iii) SendTech Solutions.
market value: $666M ($3.83 per share)
Activist: Hestia Capital Partners
Percentage ownership: 6.90%
average cost: $3.59
Activist Comment: Hestia is not an activist investor. Rather, the company is a deep value investor that will use activism as a last resort. Kurtis Wolf, Managing Director and Chief Investment Officer of Hestia, is a former strategy consultant and worked notably at Relational Investors from 2002-2004. The firm is experienced in business strategy and applies its business acumen to high value and distressed companies to determine which have a good path forward. As a result, Hestia often invests in companies that may be misunderstood or unfavored by the market, such as GameStop, Best Buy, and Pitney Bowes. The company avoids biotechnology and commodity-oriented companies. Hestia’s only previous activist involvement was in 2020 when she formed a group with Permit Capital and had a successful proxy fight at GameStop.
Hestia has worked with Pitney Bowes to improve the company’s capital allocation, improve operating performance and make changes to the composition of the board.
Pitney Bowes’ SendTech solutions business is the core business for which the company is well known: postage meters. This is a long-term declining but not disappearing business that generates significant cash flow. PBI expanded the SendTech division to include shipping labels, a growth business. The shipping labels business has historically competed, and often lost, with stamps.com, which grew into a giant company that was eventually acquired by Thoma Bravo for $6.6 billion. The SendTech Solutions segment accounts for 38% of Pitney Bowes’ revenue and generated 2021 earnings before interest and taxes of $429 million. The postage meter business makes up 89% of the division’s sales, and the mailing label business makes up the other 11%.
The Global E-Commerce segment consists primarily of three components: (i) a digital technology company, which sells the technology behind Pitney Bowes’ mail and shipping businesses, enabling customers to reduce transportation and logistics costs, the best carrier depending select and cost demand, improve delivery times and track packages in real time; (ii) a global cross-border solutions company that handles all shipping and customs procedures for international shipping for clients such as eBay; and (iii) a domestic parcel company, which is a niche e-commerce company that handles returns of items and is a competitor to companies such as FedEx and UPS. Global e-commerce accounts for 46% of Pitney Bowes’ revenue but lost $99 million in EBIT in 2021.
Its Presort Services segment accounts for just 16% of revenue but generated $79 million in EBIT in 2021. This business makes its money from post offices and simplifies the sorting process for them. Pitney Bowes collects mail from businesses in specific zip codes, sorts mail by zip code, and delivers it to post offices.
Bottom line, the company has too much business and needs to simplify. The Digital Technology and Presort businesses are synergistic with Pitney Bowes’ core business, as one provides the technology to operate and the other shares many of the same customers and gives them the ability to cross-sell. This means divesting the cross-border solutions business and the domestic parcel business. Neither shows reasonable growth or earnings. The former carries the risk of individual customer concentration, as eBay is by far the largest customer, and the latter competes with much larger companies like FedEx and UPS. Merely closing these two companies would be beneficial for shareholders, and they should be able to get some cash for it from a strategic acquirer. However, the greater benefit would be management’s focus on its core business and the ability to motivate management more appropriately. Management can focus on using the cash from the long-term declining postage meter business to invest in the growing mailing label business. The SendTech and Presort segments alone could be worth $6 to $9 a share without the distractions and dilutions of its other businesses.
Ideally, Hestia would champion this plan at board level. The company has a nine-member non-staggered board of directors with a nomination period beginning on January 2, 2023. Hestia will likely need more than a board seat to drive change at Pitney Bowes. The company has been in existence for over a century and the majority of directors have served on the board for more than 10 years. Marc Lautenbach is not necessarily the wrong CEO for this company. He’s just lost focus as his attention is drawn in so many different directions. A leaner core business with him as CEO could work very well. The company could benefit from a shareholder representative with a keen acumen in business strategy, and we would expect Hestia to include Kurtis Wolf on his list of nominees along with some veteran industry executives. With universal proxy now in play, we expect Hestia to nominate up to four directors to give shareholders a larger pool to choose from.
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.