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Company: New Relic (NEWR)
Company: New Relic is a software-as-a-service company that provides a software platform for customers to collect telemetry data and extract insights from that data in a unified front-end application. It offers a range of products on its open and extensible cloud-based platform, allowing users to collect, store and analyze telemetry data. The company’s platform also offers New Relic Instant Observability, an open-source ecosystem of quickstarts that provides pre-built integrations, dashboards, and alerts for approximately 450 technologies and frameworks. It also supports custom app development through common open-source frameworks, a library of existing applications, and a development environment.
Scholarship Value: $3.1 billion ($46.65 per share)
Activist: JANA Partners
Percentage Ownership: 4.9%
Average costs: N/A
Activist comments: JANA is a highly experienced activist investor founded in 2001 by Barry Rosenstein. The company made a name for itself by taking thoroughly researched activist positions with well-thought-out plans for long-term value. Rosenstein called his activist strategy “V cubes.” The three “V’s” were (i) value: buying at the right price; (ii) votes: know if you have the votes before starting a proxy battle; and (iii) different ways to win: having more than one strategy to increase value and exit an investment. This worked well for them until 2008 when the 19 13Ds they filed had an average 13D holding period of 23 months and yielded an average return of 39.4% versus 9.9% for the S&P 500 during those holding periods. Since 2008, they have gradually shifted that strategy to one that we characterize as the three “S’s” (i) stock price – buy at the right price; (ii) strategic activism – sale of business or spin-off of a business; and (iii) star advisors/nominees – liaising with top industry executives to advise them and take board seats as needed. Since 2008, their average holding period with this philosophy has been about nine months, but also relatively successful – with an average return of 16.2% versus 9.4% for the S&P 500 over the average holding period of nine months.
What is going on?
On June 6, JANA and the company entered into a partnership agreement, whereby the company agreed to accept the resignation of current directors Adam Messinger, Dan Scholnick and Jim Tolonen from its board of directors and Kevin Galligan (partner and director of research at JANA Strategic Investments) and Susan D. Arthur (CEO of CareerBuilder) as directors to the board of directors. JANA agreed to withdraw the announcement of a director’s appointment on May 20 and to abide by certain customary standstill provisions.
Behind the scenes
JANA is not the first activist to be involved with New Relic. Last summer, Engaged Capital and New Relic entered into an unusual agreement under which Radhakrishnan (“RK”) Mahendran, partner at HMI Capital, the company’s largest shareholder, was appointed as a director with a term expiring at the 2023 annual meeting. . In October 2021, Engaged delivered a presentation highlighting the belief that the company’s underperformance was due to issues with their technology and product strategy, product shortcomings in key areas, customer focus, and leadership gaps/high turnover. They believed that many of those historic issues had been resolved, including a new CEO and executive team, and efforts to turn around had begun to show progress. However, New Relic was still trading at a significant discount to peers – 6x EV/Revenue vs. 20x and 37.5x for peers Dynatrace and Datadog, respectively. Engaged’s plan didn’t turn out the way they’d hoped, dropping 23.30% since the date of their settlement, compared to -4.84% for the S&P 500 over the same period. This has clearly attracted the attention of JANA, who will be in a much better position to create value for shareholders with one of its own partners on the board of directors.
JANA settled for two board seats here, one for Kevin Galligan, partner and research director of JANA Strategic Investments, and one for Susan D. Arthur, CEO of CareerBuilder. This is in line with JANA’s activist strategy: buy at a good price where there is opportunity for strategic activism and operational activism in collaboration with a director with experience in the industry or operational activities. Placing both Arthur and Galligan on the board of directors adds board representatives with both operational and financial/strategic experience to provide the most flexibility in choosing the path that creates the most value for shareholders. JANA has recent experience in both areas of the technology sector – their most recent campaigns in the sector are Zendesk, where they successfully opposed the ZEN/MNTV merger and are now seeking board seats; and Vonage and Perspecta, where in both cases they successfully argued for a sale of the company.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment class, an activist investment style focused on improving ESG practices among portfolio companies.