Cognizant Declares Truce With Elliott, Pledges To Appoint 3 New Directors, Create Financial Policy Committee
Cognizant has reached an agreement with activist investor Elliott Management to appoint three new independent members to its board of directors and create a financial policy committee.
The Teaneck, N.J.-based company -- No. 7 on CRN's Solution Provider 500 -- said the three new directors will replace three of Cognizant's existing board members who have agreed not to stand for re-election. In a November letter, Elliott Management called on Cognizant to shake up its board, pointing out that more than half of the company's directors have sat on the board for at least nine years.
"Frank [D'Souza, Cognizant's CEO] and his team have been terrific partners in this process and have developed a thoughtful, balanced and highly attractive plan," Jesse Cohn, Elliott's senior portfolio manager, said in a statement. "In an evolving industry, Cognizant must continue to invest for growth and the digital transition, while further optimizing operations and returning capital to its shareholders."
Cognizant said two of the new independent directors will be named before the company sends this year's proxy statement to shareholders, which typically happens at the end of April. The third independent director will be named in conjunction with Cognizant's 2018 annual stockholder meeting, which typically occurs in mid-June.
"We are pleased to be working with Elliott and look forward to welcoming new colleagues to the board," D'Souza said in a statement. "In addition, as part of today's full-year earnings release, we announced a plan to accelerate our shift to digital, expand margin targets and launch a robust new capital return program."
Cognizant shares climbed 71 cents (1.32 percent) to $54.50 in pre-market trading Wednesday. The agreement was announced before the market opened.
Cognizant's board will also create a three-person financial policy committee to assist and advise the board on issues relating to the company's operating plan and capital allocation policy. It will be staffed by D'Souza, an incumbent director with previous operational experience, and one of the new directors.
As part of Cognizant's plan to accelerate its shift to digital services, the company also announced that it plans to invest more organic funds in re-skilling and new technology practices, as well as strategic tuck-in acquisitions around intellectual property, industry expertise, and platform and technology capabilities.
In its November letter, Elliott had called on Cognizant to use 25 percent of its annual U.S. free cash flow as well as $1 billion in foreign cash to fund a steady pace of 14 attractive tuck-in acquisitions. Since then, Cognizant has acquired 100-person Australian consultancy Adaptra and Netherlands-based digital marketing agency Mirabeau BV.
Cognizant has additionally agreed to target non-GAAP operating margins of 22 percent by 2019 by streamlining its cost structure, improving operational efficiency and aggressively employing automation to optimize traditional services.
Finally, Cognizant said it plans to return $3.4 billion to shareholders in the next two years through a mix of share repurchases and dividends. Specifically, Cognizant said it plans to begin a $1.5 billion share repurchase program this quarter, initiate a regular quarterly 15 cents-per-share cash dividend in the second quarter, and repurchase $1.2 billion in shares on the open market by the end of 2018.
All told, Cognizant said it will return approximately three-quarters of its U.S. free cash flow to shareholders on an ongoing basis beginning in 2019.
Elliott in November had called on Cognizant to buy back $2.5 billion in shares as part of what it called a value enhancement plan aimed at driving up shares by 50 percent to 69 percent over the next year. That plan would be funded with $1 billion in domestic cash and an incremental $1.5 billion in new debt, Elliott said in November.
The activist investor also called on Cognizant to immediately institute a long-term capital return program that returns 75 percent of U.S. free cash flow to shareholders and offers a 1.5-percent dividend yield. Cognizant has underperformed its core IT services peers by 83 percent over the past half-decade despite growing revenue at a faster clip than the group average, Elliott Management said in November.
In return, Elliott Management has promised to support the agreement, and agreed to certain customary standstill provisions. Elliott announced in November that it had taken a four percent stake in Cognizant, which represents a market value of $1.4 billion.
Under the standstill provisions, Elliott has agreed not to acquire more than 4.99 percent of Cognizant's stock, seek the removal of any of Cognizant's additional board members, or participate in any efforts to merge or acquire the company. These terms were laid out in a filing with the U.S. Securities and Exchange Commission (SEC) Wednesday morning.