Alight's board may see improvements in margins with Starboard's director nominations.

Company: Alight (ALIT)

The company offers cloud-based integrated digital human capital and business solutions worldwide through three segments: employer solutions, professional services, and hosted business. The employer solutions segment provides employee wellbeing, integrated benefits administration, health-care navigation, and other services. The professional services segment offers consulting services such as cloud advisory, deployment, and optimization for cloud platforms. The hosted business unit provides hosting and management of human capital management software, as well as human resources and payroll services.

Stock Market Value: $4.99B ($9.04 per share)

Activist: Starboard Value

Percentage Ownership: 7.79%

Average Cost: $8.95

Starboard is a highly successful activist investor with a wealth of experience in improving operational efficiency and increasing margins. Over the course of its history, the firm has launched a total of 149 activist campaigns and achieved an average return of 25.58%, compared to 13.25% for the S&P 500 over the same period. Additionally, Starboard has a strong track record in the information technology sector, where it has achieved a return of 38.79% in 52 prior engagements, compared to 16.56% for the S&P 500 over the same period.

What's happening

On February 16th, Starboard sent a letter to Alight, nominating four candidates for election to the board at the 2024 annual meeting. These candidates are Keith D. Dorsey, Matthew C. Levin, Gavin T. Molinelli, and Coretha Rushing.

Behind the scenes

Alight, which generates 87% of its revenue from employer solutions, operates through three segments - employer solutions, professional services, and hosted business. The company went public on July 6, 2021 through a special purpose acquisition company, combining with Foley Trasimene Acquisition Corp, and William P. Foley, II, became chairman. The company opened on its first trading day at $10 a share, closed at $9.03, and today sits at $9.04. This is just another example of what we predicted years ago: the SPAC boom fertilizing the landscape for activist investors.

Alight, a De-SPACed company, faces several challenges including corporate governance deficiencies, high leverage, depressed margins, and a CEO with limited benefits administration experience. To address these issues, Alight plans to reduce its debt-to-EBITDA ratio, improve margins through cost-cutting measures, and revamp its leadership team. The company's CEO, Stephan Scholl, is a talented technologist but lacks experience in operating a benefits administration company. The board has been trying to change the company's image from a benefits administrator to a software company, leading to increased expenses and executive compensation despite declining performance. To improve corporate governance, the addition of shareholder nominees to the board will signal to the market that the company is on the right track.

Starboard nominated four directors for election to the Alight board at the 2024 annual meeting, including Keith D. Dorsey, Matthew C. Levin, Gavin T. Molinelli, and Coretha Rushing. This move was made to preserve Starboard's options as it speaks privately with Alight and to give them flexibility if the situation does not settle quickly. While there are only three seats up for election, Starboard nominated four directors to ensure they have the necessary representation on the board. They will withdraw one nominee when it comes time to finalize their proxy card.

The addition of two or three Starboard directors to the board would certainly benefit shareholders. However, the incumbent slate could pose a challenge to them with two directors who have been appointed in the past year and Alight's chairman Foley. One of those directors, Denise Williams, worked at FIS when Foley was vice chairman of the board, making her the most vulnerable as one of three other directors with a prior relationship to Foley, but the only one up for election this year. We do not think shareholders would vote Foley off the board, but that is not a risk he would want to take. A large vote against him would be embarrassing and a vote of confidence for Starboard. Generally, we would expect this to settle, but it is hard to predict with SPAC companies, which tend to be less likely to welcome uninvited directors on to the board, particularly when the SPAC sponsor is still in charge.

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