Starboard takes a stake in Splunk. Here’s how the activist investor may help boost margins

Business: Splunk is simply a starring supplier of exertion bundle that collects and analyzes information from integer systems to assistance organizations place information threats and show IT infrastructure. The institution tin instrumentality important amounts of unstructured information from assorted systems and travel up with insights that assistance alert IT teams to imaginable failures oregon breaches.

Stock Market Value: $13.9B ($85.67 per share)

Percentage Ownership: nearly 5.0%

Average Cost: n/a

Activist Commentary: Starboard is simply a precise palmy activistic capitalist and has extended acquisition helping companies absorption connected operational ratio and borderline improvement. Starboard besides has a palmy way grounds successful the accusation exertion sector. In 48 anterior engagements, it has a instrumentality of 34.45% versus 13.57% for the S&P 500 implicit the aforesaid period.

Starboard views Splunk arsenic an accidental to ain a precocious prime and sticky concern astatine an charismatic valuation with the imaginable for important worth instauration done a amended equilibrium of maturation and profitability. Splunk's bundle is ngo captious for astir companies, and it has a highly recurring concern with astir 22,000 customers, including 95 of the Fortune 100 companies. Splunk has a starring marketplace stock and is considered the "gold standard" successful the log absorption and information markets.

Over the past respective years, Splunk has been undergoing a analyzable concern transition. The institution has been going from a perpetual licence to subscription-based model, starring to antagonistic escaped currency travel arsenic they transitioned to an yearly invoicing exemplary successful 2019. It is adjacent the extremity of this transition. In 2022, it began generating affirmative escaped currency travel for the archetypal clip since the modulation began.

This is simply a emblematic Starboard concern – a institution with beardown top-line maturation and enviable marketplace presumption that needs assistance with optimizing maturation and margins. Often this requires a alteration successful management. Well, bully quality for Starboard and different shareholders: This is already happening.

In November 2021, CEO Doug Merritt stepped down. In March 2022, Splunk announced it would name Gary Steele, founding CEO of Proofpoint, to the helm. Splunk is present searching for a caller CFO. Steele has a past of operational execution. In August 2021, Thoma Bravo bought Proofpoint astatine all-time precocious prices. Starboard believes that determination is important accidental for the caller absorption squad to amended operational performance.

Technology companies similar this are mostly compared connected a maturation positive profitability metric. Splunk presently has a 17% maturation complaint and an 11% operating margin, giving it a combined 28, versus a adjacent median of 47. Starboard believes that Splunk's operating margins tin get to astatine slightest 30% (peers are presently astatine 26%) and gross maturation tin transcend 20% (peers are astatine 21%), which would enactment it close up determination with the adjacent median. Starboard believes that achieving this could treble the company's valuation. 

With a caller absorption team, it is not arsenic urgent that Starboard get committee seats close away. They volition apt enactment with Splunk arsenic an progressive shareholder. If they bash spell connected the committee successful the abbreviated term, it volition beryllium due to the fact that the institution invites them connected aft seeing however invaluable Starboard tin beryllium and has been successful situations similar this. If this does not hap by Feb. 16 — erstwhile the shareholder manager information model opens — and determination is nary marked betterment successful operations, we volition apt spot Starboard marque manager nominations.

While this is intelligibly an operational engagement for Starboard, it indispensable beryllium noted that determination is different accidental to make shareholder worth here. When an activistic takes a presumption astatine a company, it puts that institution successful pseudo-play with imaginable acquirers often coming retired of the woodwork. It is imaginable that thing similar that could hap here. In February, erstwhile Splunk had an $18.4 cardinal marketplace cap, the Wall Street Journal reported that Cisco made a $20-plus cardinal offer to get the company. You would deliberation that their involvement level has piqued a small with Splunk present trading astatine a $12.7 cardinal marketplace cap.

Ken Squire is the laminitis and president of 13D Monitor, an organization probe work connected shareholder activism, and helium is the laminitis and portfolio manager of the 13D Activist Fund, a communal money that invests successful a portfolio of activistic 13D investments. Squire is besides the creator of the AESG™ concern category, an activistic concern benignant focused connected improving ESG practices of portfolio companies.