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Company: Rogers (ROG)
Business: Rogers designs, develops, manufactures and sells engineered materials and components. It operates through Advanced Electronics Solutions (AES), Elastomeric Material Solutions (EMS) and Other segments. In November 2021, the company entered into a definitive merger agreement to be acquired by DuPont de Nemours for $277.00 per share, which was approved by shareholders on Jan. 25, 2022. Ultimately, the merger was terminated after the parties did not receive regulatory approval before Nov. 1 from the State Administration for Market Regulation of China.
Stock Market Value: $2.8B ($150.99 per share)
Activist: Starboard Value
Percentage Ownership: 6.5%
Average Cost: $127.50
Activist Commentary: Starboard Value is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard also has a successful track record in the information technology sector. In 50 prior engagements, it has a return of 36.80% versus 14.83% for the S&P 500 over the same period.
On Dec. 15, 2022, Starboard delivered a letter to the company nominating four directors for election to the board at the 2023 Annual Meeting. Starboard identified the following six candidates for the four seats but intends to ultimately include only one of the Starboard insiders in the slate and withdraw the other two: (i) Jacques Croisetière, board member at Arconic (ARNC) and former director at Versum Materials (formerly VSM); (ii) Peter A. Feld, managing member and head of research at Starboard Value; (iii) Armand F. Lauzon, Jr., former president, CEO and as a director of C&D Technologies and former CEO and board member for three portfolio companies of the Carlyle Group (CG); (iv) Gavin T. Molinelli, partner and co-portfolio manager of Starboard Value; (v) Jeffrey C. Smith, managing member, CEO and CIO of Starboard Value; and (vii) Susan C. Schnabel, co-founder and co-managing partner of aPriori Capital Partners.
Behind the Scenes
Rogers manufactures a variety of products, many of which are small volume customized products that have a long life cycle. Historically, the company has been known for its innovation and many of its products were invented by the company or have strong brand recognition. This has given Rogers strong pricing power and good gross margins. Because of this, the company has not had to be as diligent operationally and their manufacturing and operational execution has not been optimal.
In November 2021, DuPont agreed to acquire the company for $277 per share (19x earnings before interest, taxes, depreciation and amortization at the time), a healthy premium that was rationalized by the projection that Rogers would generate $270 million of EBITDA in 2022. However, between signing and closing, quarter after quarter Rogers’ operating margins went down, ultimately from 17% pre-deal announcement to 11% by September 2022. By this point, DuPont would have been paying a 30x multiple, and their shareholders were no longer happy with the deal. The deal ended up not closing because it did not get China regulatory approval by the drop-dead date, but it is likely that due to the deteriorating operations of Rogers, DuPont was happier to pay the $162.5 million termination fee than to buy the company for $5.2 billion.
The problem with Rogers is not at the top line: The company has strong organic growth with 30% to 35% exposure to industries with secular tailwinds, such as electric vehicles and assisted driving. The company’s issues are with its operations, and these issues are self-inflicted. Like many companies, it has supply chain issues, but its manufacturing yields have been bad, and missteps have led to delays. This means having to use air freight instead of ocean, which is much more expensive. When a company has operational challenges, this issue gets exacerbated when management loses focus and that is exactly what happened here. After the deal was signed with DuPont, management lost focus and started to coast to their change-of-control payments. Unfortunately, instead it led to DuPont walking from the deal, these payments never happening and a precipitous drop in the stock price. It also may have led to Bruce Hoechner departing as CEO at the end of 2022 and being replaced by Colin Gouveia, who was then senior vice president and general manager of Rogers’ EMS business.
A new CEO with a renewed focus is just what this company needs. Having a couple of Starboard directors on the board to support management in executing their plan, but holding them accountable if they cannot, would magnify the efficacy of the new CEO. There is no reason why this should not end amicably. Both sides seem to share the same views regarding margin improvement, and there is a new CEO who Starboard likely supports. Moreover, Starboard made its director nominations right before the Dec. 17, 2022 expiration of the nomination window, indicating that the firm did it just to preserve its rights while talking with the company. The fact that both sides have kept the nominations confidential over the past seven weeks is another indication that they are working amicably. However, Starboard did nominate four directors to the ten-person board. They actually nominated six directors for four spots, two of whom would be withdrawn if this goes to a proxy fight, which is something experienced activists do to give them optimal flexibility.
Growth is not an issue here and helping companies focus on operational efficiency and margin improvement is what Starboard does best, ideally from a board level. Having Starboard representation on the board would help management stay focused and get the support it needs. We are not sure four new directors are necessary, but certainly two or three would be reasonable, especially if one of those seats is for a Starboard insider.
Finally, while Starboard’s primary objective here is operational, when an activist engages with a company, it often puts that company in pseudo-play getting the attention of strategic investors and private equity. This phenomenon is magnified in a situation where a company just terminated an acquisition at a price that is over 90% higher than where the stock is trading now. There could definitely be potential acquirers coming out of the woodwork here. While Starboard is not advocating for any strategic transaction, the firm is an economic animal with fiduciary duties. If an offer came in at the right price, Starboard would weigh that against shareholder value as a standalone entity and do what it believes to be best for shareholders. However, a strategic transaction would make the most sense after the company fixes margins.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Rogers is owned in the fund.