Starboard nominates directors to Alight’s board. A plan to improve margins could be on the horizon

Business: Alight provides cloud-based integrated digital human capital and business solutions worldwide. The company operates through three segments: employer solutions, professional services, and hosted business. The employer solutions segment offers employee wellbeing, integrated benefits administration, health-care navigation and other services. The professional services segment provides consulting offerings, such as cloud advisory, deployment and optimization services for cloud platforms. The hosted business unit provides hosting and management of human capital management software, as well as human resources and payroll services.

Stock Market Value: $4.99B ($9.04 per share)

Percentage Ownership: 7.79%

Average Cost: $8.95

Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has taken a total of 149 activist campaigns in its history and has an average return of 25.58% versus 13.25% for the S&P 500 over the same period. Starboard also has a successful track record in the information technology sector. In 52 prior engagements, the firm has a return of 38.79% versus 16.56% for the S&P 500 over the same period.

On Feb. 16, Starboard sent a letter to Alight, nominating the following four director candidates for election to the board at the 2024 annual meeting: (i) Keith D. Dorsey, managing partner and the U.S. practice leader of CEO and board services at Boyden and former EVP, global head of sales at Alight Solutions; (ii) Matthew C. Levin, CEO of People2.0 and former president, CEO and a member of the board of Benefitfocus; (iii) Gavin T. Molinelli, senior partner and co-portfolio manager of Starboard Value LP; and (iv) Coretha Rushing, managing director and executive mentor for The ExCo Group and president of CR Consulting Alliance.

Alight operates through three segments – employer solutions, professional services, and hosted business – generating 87% of revenue from employer solutions, which is a benefits administration platform similar to offerings from ADP and TriNet. The company went public on July 6, 2021 via a special purpose acquisition company, combining with Foley Trasimene Acquisition Corp, and William P. Foley, II, became chairman. The company opened on its first trading day at $10 a share, closed at $9.03, and today sits at $9.04. This is just another example of what we predicted years ago: the SPAC boom fertilizing the landscape for activist investors.

De-SPACed companies may be fraught with corporate governance deficiencies and tend to trade down as many investors have simply lost interest in SPACs. Alight’s issues go further than that. Blackstone, which owned the company when it was private, was a forced seller as the fund that owned it was being wound down. But, more problematic, Alight is highly levered, has depressed margins and a CEO with limited benefits administration experience. As a result, the company trades at a 7-times multiple of free cash flow versus 20-times plus for its peers. All these problems do have solutions. Debt Issue: In 2022, Alight traded at a 4.8 times debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, and management is targeting to get that down to 2.5 times. Margin Issue: The company has been taking steps to alleviate its margin and cost issues. First, it has plowed $120 million of capex into front-end improvements and client success, utilizing artificial intelligence and emerging technologies to reduce call-center utilization for customer support. In addition, they are also revamping back-end processes to a cloud-based system. Such improvements could potentially boost margins from 21% to 26% by 2026 or sooner. Additionally, Starboard has extensive experience helping portfolio companies improve margins from a board level and adding one or two of their nominees to the board could expedite this. CEO Issue: Alight’s CEO Stephan Scholl is a talented technologist and software expert, but not an experienced operator of a benefits administration company. The board has been trying to change the image of the company from a benefits administrator to a software company and that has led to increased expenses. In the past two years, selling, general and administrative expenses have ballooned 35% to over $670 million, indicating a relative lack of cost discipline typical of software and technology companies, but that is untenable in this industry. Moreover, executive compensation has been up despite declining performance and depressed share price. In the past three years, the CEO has made a total of more than $82 million, while the stock price has been stagnant. This does not mean that Alight necessarily needs a new CEO, but it needs a board that can implement the proper vision, hold management accountable and compensate management in alignment with shareholders. Corporate Governance Issue: Chairman William Foley is a brilliant entrepreneur, but the SPAC sponsor has instituted a staggered board with little industry experience, which is somewhat insular. While this issue is not going to get fixed overnight, the addition of shareholder nominees to the board will go a long way to signal to the market that the company is on the right track.

Margin improvement could increase free cash flow to $1.20-$1.40 per share. The other improvements could get investor confidence back and get Alight to trade from 7-times free cash flow where it is now to 20-times free cash flow where its peers trade. To do this would require some change in the boardroom. Accordingly, on Feb. 16, Starboard nominated Keith D. Dorsey, Matthew C. Levin, Gavin T. Molinelli and Coretha Rushing for election to the board at the 2024 annual meeting. While this may appear as a “shoot first and ask questions later” approach, Starboard made these nominations at this time because the deadline to do so was Feb. 17. Like the experienced activist Starboard is, the firm wanted to preserve its options as it speaks privately with Alight. Additionally, while there are three seats up for election at the upcoming annual meeting, Starboard nominated four directors to give them flexibility if this does not settle quickly. They will withdraw one nominee when it comes time to finalize their proxy card. 

Shareholders would certainly benefit from the addition of two or three Starboard directors to the board. We believe, in a proxy fight and with the universal ballot, Starboard would generally get at least two. However, the incumbent slate could be challenging to them with two directors who have been appointed in the past year and Alight’s chairman Foley. One of those directors, Denise Williams, worked at FIS when Foley was vice chairman of the board, so we see her as the most vulnerable as one of three other directors with a prior relationship to Foley, but the only one up for election this year. We do not think shareholders would vote Foley off the board, but that is not a chance he would want to take. A large vote against him would be embarrassing and a vote of confidence for Starboard. Generally, we would expect this to settle, but it is hard to predict with SPAC companies, which tend to be less likely to welcome uninvited directors on to the board, particularly when the SPAC sponsor is still in charge.

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.