Jana sees large upside on this uncommon expertise play serving industries like building

Share Possession: n/a

Common Price: n/a

Activist Commentary: Jana is a really skilled activist investor based in 2001 by Barry Rosenstein. They made their title taking deeply researched activist positions with well-conceived plans for long run worth. Rosenstein known as his activist technique “V cubed”. The three “Vs” have been” (i) Value: buying at the right price; (ii) Votes: knowing whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, they have gradually shifted that strategy to one which we characterize as the three “Ss” (i) Stock price – buying at the right price; (ii) Strategic activism – sale of company or spinoff of a business; and (iii) Star advisors/nominees – aligning with top industry executives to advise them and take board seats if necessary.

On December 11, 2023, JANA Partners announced that they have taken a position in Trimble Inc and are calling on the Company to cease M&A activities and instead focus on organic growth in its existing businesses

Trimble began in 1978 as a GPS expertise firm, primarily for agriculture. Within the 2000s it entered the development trade with its acquisition of Spectra Precision. It continued rising via acquisition and over the previous 10 years has spent $5 billion on acquisitions, primarily shopping for software program companies with the aim of offering an interconnected {hardware} and software program product. In 2012, they acquired the 3D modeling software program package deal SketchUp from Google and continued to develop their Constructing Info Modeling portfolio with the acquisition of Tekla in 2014. In 2016, Trimble acquired Sefaira, a software program for sustainability evaluation together with power modeling and daylight visualization. Extra not too long ago, in 2018, Trimble acquired Viewpoint (a number one supplier of building administration software program) from Bain Capital for $1.2 billion, and in 2019 launched Trimble MAPS, consolidating a number of of its earlier acquisitions. They now provide {hardware} and software program options in under-tech served industries reminiscent of building, transportation, forestry and agriculture.

The corporate’s a number of software program acquisitions have led to their combine altering in a really constructive means. In 2011, 16% of their income got here from software program and providers which can be by their nature recurring and better a number of income. In 2024, it is going to be greater than half. Nonetheless, whereas the enterprise combine has remodeled for the higher, throughout this time the inventory has considerably underperformed – over the previous three years, the inventory has underperformed the S&P 500 by almost 50%.

Plenty of this underperformance might be tied to their current historical past of software program M&A exercise. They’ve been shopping for firms for 30 to 40 occasions EBITDA and the acquired firms are being valued at Trimble’s EBITDA a number of of 14 occasions EBITDA inside Trimble. The market understands this and in consequence, has reacted negatively to their acquisitions, as not too long ago evidenced by their April 2023 acquisition of Transporeon (a cloud-based transportation administration platform) for 30 occasions EBITDA. After the deal was introduced, the corporate’s inventory dropped 6.5%. Trimble is just not getting credit score for his or her new product combine with a re-rating to a better software program a number of. This doesn’t imply 30 to 40 occasions EBITDA, however industrial expertise friends commerce within the mid-teens to mid-20s.  If they’ll get in step with friends, Jana sees a inventory upside of over 40%.

The very first thing Jana would really like the corporate to do is stop M&A exercise and concentrate on the core enterprise. To do that, the board ought to tie govt compensation to return on invested capital, as a substitute of the present compensation construction which incentivizes income progress targets. Second, Jana sees a possibility for the corporate to concentrate on enhancing operations and revenue margins. Over the previous eight years of accelerating software program product combine the corporate has expanded its gross margins by roughly 800 foundation factors, but they’ve expanded their EBITDA margins by solely 500 foundation factors (1 foundation level equals 0.01%). There is a chance to raised combine these acquisitions and enhance working margins. Lastly, this can be a sophisticated enterprise construction that would profit from a simplification. This previous September, Trimble introduced that it entered a three way partnership with AGCO Company (AGCO) (a worldwide producer and distributor of agricultural equipment and Precision Ag expertise), whereby AGCO will purchase an 85% curiosity in Trimble’s portfolio of Ag belongings and applied sciences for $2.0 billion. This acquired the other market response than when Trimble acquires firms, sending Trimble’s inventory worth up 6.5%.

Whereas their main goal right here is to have the corporate stick with the core enterprise and stop their M&A exercise, there’s one other ironic alternative right here, and that’s the M&A chance created by the corporate’s historical past of worth destroying M&A. Trimble could possibly be a gorgeous acquisition goal for a bigger industrial firm who additionally needs a product combine with extra software program however has the self-discipline to not pay 30 to 40 occasions EBITDA for software program firms. With a better than 50% software program combine and a a lot decrease EBITDA a number of, Trimble could be a gorgeous asset for a lot of massive industrial firms.

Jana usually launches activist campaigns with a crew of skilled trade executives able to be board nominees if essential. Whereas we assume they’ve connections to such executives, there was no announcement that they’ve recruited any, which suggests to us that it’s too early to inform if this might be escalated. Nonetheless, we won’t have to attend that lengthy. The director nomination window opens on February 2, 2024, at which era we could have extra readability on which highway this marketing campaign will take.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.