Starboard tries to find another winner in the fintech space

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Jeffrey Smith, CEO of Starboard Value LP and Chairman of Papa John’s International Inc.
Brendan McDermid | Reuters

Company: ACI Worldwide, Inc. (ACIW)

Business: ACI Worldwide, Inc. develops and markets software products and services focused on facilitating electronic payments. Its products and services are used principally by financial institutions, retailers, billers and electronic payment processors, both in domestic and international markets.

Stock Market Value: $3.7 billion ($32.14 per share)

Activist: Starboard Value

Percentage Ownership:  9.0%

Average Cost: $27.83

Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement.  Starboard has had recent success in the electronic payments industry. It filed a 13D on Green Dot Corp (GDOT) on February 3, 2020 and has seen a return on its investment of 126.60% versus 5.48% for the S&P500 over the same time period.

What’s Happening:

Starboard believes there are operational and strategic opportunities at ACIW to create shareholder value.

Behind the Scenes:

ACI Worldwide has somewhat quietly evolved from a small cap company to a mid cap company through a serious of small acquisitions. As a result, it is one of the least followed companies in the payment space, an industry that is hot and growing and experiencing valuation expansion. Starboard has gotten to know this industry well after its investment earlier this year in Green Dot, another payment company.

ACI has three main business segments and some ancillary “up-sell” software products. The first segment is the bill pay product. This is the company’s back-end software that allows customers such as utility or cable companies to send out bills and accept payments through different payment rails such as credit or debit cards, ACH or wire transfers. This can all be integrated with a desktop or mobile and has additional features the customer can choose to implement such as adding convenience fees for credit cards. The second segment is the company’s core processing software for retail and merchant payments. ACI was the first to develop this software and it includes a host of payment processing software which has the ability to route transactions from one point to another. These businesses allow ACI to provide a full suite of solutions to banks and merchants. The third main segment at the company is comprised of a newer suite of products called Real-Time Payments. These are newer forms of payment rails which are based on different technology. Unlike the typical payment rails such as credit cards, ACH and wires which can take multiple days for payments to clear and transfer, this technology allows banks to access real time payment networks. This business is not available yet in the United States but is growing 20% a year internationally and that growth rate is accelerating.

The company has grown historically through acquisitions (18 in 20 years) but organic growth has stalled somewhat and margins are a little compressed. They are now at a point where management needs to bring margins from 25% to over 30% and get organic growth to at least mid-single digits. The company hired a new CEO in March and he has already begun a bottom up strategic review of the different businesses. Moreover, he could very well be the right person to clean up this business and Starboard, as it has done in many other activist situations, could be very helpful from a board level.

If growth and margins do not show improvement by next year, management may be forced to explore a sale of the Company. There have been rumors of strategic interest from companies like FIS Global or Fiserv, or a large technology company such as Microsoft – these companies could use ACI’s core payment processing software to accelerate their own efforts. Additionally, there could also be private equity interest – the thesis here would be to take the company private, clean it up, sell its real time payments and core processing businesses, roll up the remaining bill pay business and take that business public again.

Like most good activists, Starboard likes situations where there is more than one path to create value. Generally, their engagements have a core operational path and a secondary strategic opportunity. This situation is no different in that it has an operational and strategic element to it. However, what is different here is that unlike most of Starboard’s prior campaigns, the greater opportunity for value creation here might be the strategic path. 

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. ACI Worldwide is a position in the fund.

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