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Company: Vertiv Holdings (VRT)
Business: Vertiv designs, manufactures and services critical digital infrastructure technologies and life cycle services for data centers, communication networks, and commercial and industrial environments. The company went public through a SPAC merger in the first quarter of 2020 with GS Acquisition Holdings, a SPAC co-sponsored by an affiliate of The Goldman Sachs Group and David M. Cote, CEO of GSAH and former executive chairman of the board and CEO of Honeywell. Cote currently serves as the Vertiv’s executive chairman.
Stock Market Value: $5.6B ($14.96 per share)
Activist: Starboard Value
Percentage Ownership: 7.38%
Average Cost: $11.21
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has made 107 prior 13D filings and has an average return of 26.35% versus 10.82% for the S&P 500 over the same period. Only ten of these 13D filings were on companies in the industrials sector, but in those ten 13Ds, Starboard has a return of 52.55% versus 1.14% for the S&P 500 over the same period.
Behind the Scenes
Starboard sees Vertiv as a great business in a solid industry with secular tailwinds – more data is being generated every day requiring more data centers. It’s also somewhat recession proof – consumers still need to cool their data centers in recessionary environments. Vertiv is a market leader in data center equipment and services and has a leading market position in thermal and services, which are critical for compute-intensive and hyperscale data centers.
Vertiv is a collection of businesses put together 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 up the company and either take it public or sell to a strategic buyer. However, during that time SPAC-mania hit the markets, and Platinum Equity took advantage by taking it public through a SPAC in the first quarter of 2020 for a $5 billion enterprise value.
After going public, Vertiv delivered solid results, which allowed management to continue to focus on revenue growth, rather than operating margins. As inflation started to rise and costs increased, the company’s peers raised prices, but Vertiv did not. This led to the company drastically missing earnings expectations in the fourth quarter of 2021, taking the stock down nearly 37% in one day. By that time, Platinum Equity had sold its 36% position down to 10.8%. Possibly the best thing to come out of the SPAC transaction is that former Honeywell chairman and CEO Dave Cote was made executive chairman of Vertiv, and he was now promising shareholders increased involvement and complete oversight of the company’s operations.
Cote has a well-founded reputation as a great operator who is focused on operational efficiency and margins over growth. He created significant value as CEO of Honeywell where he transformed margins and is a proven operator. CEO Rob Johnson had been focused on growth over operational execution leading to an operating margin of 8% to 9% versus peers like Schneider Electric and Eaton Corp. at 20%. On Oct. 3, Vertiv announced that Johnson would step down as CEO as of Dec. 31, and be replaced by Giordano Albertazzi, who currently serves as president, Americas at the company. This is obviously a decision of a board chaired by Cote, and we would expect that Albertazzi would be focused more on operational efficiency like Cote.
This is a typical situation for Starboard: a private company CEO running a public company like a private company leading to underperforming operating margins. In a case like this, Starboard would historically come in, get board seats and help find the right CEO to focus on operations with the firm supporting and overseeing management from a board level. But a lot 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 – the exact type of chairman that Starboard historically would hope to nominate. Accordingly, we do not expect this to be a confrontational engagement for Starboard.
Both Starboard and Vertiv seem to be on the same page. Having said this, we would expect that Starboard would want some level of board representation to oversee margin improvements, and if management is familiar with Starboard’s history, they should welcome them onto the board. Starboard will likely work constructively with management to close the margin gap either as an active shareholder or as a director invited on to the board. If Vertiv does not extend an invitation and operating margins do not look like they are going in the right direction by March 2023 when the director nomination window closes, we can see Starboard making nominations, but we do not expect it to come 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 activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.