What Elliott plans to do with F5 Networks after earlier successes with expertise
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Company: F5 Networks, Inc. (FFIV)
Companies: F5 is a leading provider of multi-cloud application services that enable its customers to develop, deploy, operate, secure and control applications in any architecture, from the local to the public cloud. The company’s offering, based on the Traffic Management Operating System (TMOS), includes software products for local and global traffic management, network and application security, access management, web acceleration, and various network and application services. These products are available as modules that can be run individually or as part of an integrated solution on the BIG-IP appliances specially developed for the company and the hardware based on VIPRION chassis, or as a pure software edition.
Market value: $ 9.8 billion ($ 159.46 per share)
Activist: Elliott Associates
Percentage ownership: n / A
Average cost: n / A
Activist Comment: Elliott has a history as a leading activist investor in technology companies. Her team consists of analysts from leading tech private equity firms, engineers and business partners – former technology CEOs and COOs. When evaluating an investment, they also hire specialist and general management consultants, cost analyst experts, and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board members. Elliott filed a 13D with F5 competitor Citrix Systems, Inc. (CTXS) on June 11, 2015, outlining a plan for the company that included the valuation of non-core assets including the sale or spin-off of the GoTo franchise on February 1, 2017. Elliott partner Jesse Cohn served on the Citrix board of directors from July 2015 to April 2020.
Elliott, who has held a position in F5 according to multiple reports, believes that F5 has operational and strategic opportunities to create shareholder value.
Behind the scenes
F5’s main competitor is Citrix Systems, Inc. Elliott had a 13D live login with Citrix from June 2015 to November 2019, and Jesse Cohn, Elliott partner and head of US activism, was on the Internet from July 2015 to April 2020 Citrix Board of Directors. Elliott got to know the industry and F5 very well, but really couldn’t invest in F5 until Jesse left the Citrix board a little over six months ago.
As with Citrix, there is an option for key activists. The company’s spending is growing faster than revenue, and two recently unintegrated acquisitions have not contributed to operating margins, which continue to decline despite strong gross margins. Elliott would likely work with the board and management to drive operating margins from 30.5% to 36% to 38%, an area the company was in for ten straight years prior to 2019. While the judges are not yet aware of the company’s two most recent acquisitions (Shape Security and NGINX), emphasis needs to be placed on integrating these companies and stopping future acquisitions that don’t make sense. This doesn’t mean that smaller acquisitions with companies that could be sold through F5’s channels don’t make sense, as we saw with Akami when Elliott was involved there.
In the activism world, Elliott is best known for his successful strategic activism with small / mid-cap tech companies and generally gets into such situations with plans to pursue a sale of the company. However, they are also very adept at operational activism, as demonstrated at Citrix and Akami, and as in these situations, the operational path is the preferred path to creating shareholder value. But Elliott has deep tentacles in private equity and strategic acquisition and they always have a strategic plan – this time it’s just plan B.
When operational improvements are not working, or management is unwilling or unable to make the improvements needed, we can expect Elliott to push for strategic options. In this case, very strong acquisition interest is expected from both private equity and strategic acquirers such as Broadcom. The company is one of the cheapest names in the tech sector right now, trading on less than 10x cash flow. Nevertheless, the company continues to grow and is highly profitable. A private equity firm could pay north of $ 175 for the company, while an acquisition could make sense for a strategic investor like Broadcom north of $ 200.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets