Concentrix presents an opportunity for activist Impactive to create value through an ESG focus.

Company: Concentrix (CNXC)

The company offers technology-infused solutions for customer experience (CX) and serves 2,000 customers worldwide. It is the second largest outsourced CX company globally and provides optimization of CX processes, innovation of technology, automation of front- and back-office operations, analytics, and business transformation services. Additionally, it offers customer lifecycle management, strategy and design for CX/UX, analytics, and actionable insights.

Stock Market Value: $4.8B ($72.59 per share)

Activist: Impactive Capital

Percentage Ownership:  5.11%

Average Cost: $106.48

Impactive Capital, founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar, is an activist hedge fund that focuses on positive systemic change to build more competitive, sustainable businesses for the long run. The firm is an active ESG (AESG) investor that has made a name for itself in just five years, with almost $3 billion in assets under management. Impactive uses traditional operational, financial, and strategic tools, but also implements ESG change that is material to the business and drives profitability of the company and shareholder value. The firm looks for high-quality businesses that are usually complex and mispriced, where it can underwrite a minimum of a high-teens or low-20% internal rate of return over a three- to five-year holding period. Impactive also seeks active engagement with management to set up multiple ways to win.

What’s happening

Impactive Capital has reported a 5.11% interest in CNXC for investment purposes.

Behind the scenes

Concentrix, a high-quality business and the second-largest outsourced CX company globally, has a 96% retention rate, average client tenure of 15 years, and high switching costs. Once clients choose an outsourced provider, they are extremely loyal due to the complexity of implementation, which can take up to 12 months. This sticky and profitable growth has led the company to grow operating margins nearly 600 basis points from 8.3% in 2016 to 14% in 2022. Additionally, Concentrix has very low cyclicality, showing resilience across various economic conditions, including Covid. The company's scale benefits have created a competitive advantage, positioning it to take share and drive more than 30% IRR. Concentrix has grown both organically and via acquisition over the past 15 years to get to its leading position in the sector. Just last month it acquired Webhelp, creating a diversified global CX leader. Combined, Concentrix and Webhelp could generate double-digit profit and free cash flow growth.

Despite having a mid-teens free cash flow yield and being less than 7 times earnings, Concentrix trades at the lowest multiple in its history. In contrast, peers trade at 18 times earnings. This dislocation is mainly due to generative AI fears, even though Concentrix is a stable business that is capital light and growing. However, technological innovation is not a new factor in this industry. Since 1994, the CX industry has witnessed the creation of the internet, text-based chat bots, email, and an initial wave of artificial intelligence-based chatbots five years ago. The net effect of this innovation has been that the major players have grown their business fifty-fold. Impactive believes that AI has the potential to be transformative in how it allows companies to be productive and grow their top line. Customer service and human interaction will always be an important factor to a growing enterprise, and AI has the potential to drive demand as we have seen in both the health insurance and airline industries.

Historically, Impactive has employed an activist toolbox that includes strategic initiatives, operational improvements, capital structure, and ESG. The firm sees significant strategic and capital allocation opportunities with Concentrix, which is expected to generate $2.5 billion in free cash over the next three years, with $1.5 billion of debt capacity to deploy into accretive acquisitions and share repurchases. As a value-added stockholder, Impactive can assist Concentrix in analyzing how to use this cash, whether for share repurchases, organic growth, or mergers and acquisitions.

The CX industry has a high turnover rate, with employee turnover ranging from 20% to 60% per year. Replacing one employee can cost about 20% to 30% of a worker's yearly wage. Impactive is currently working with the company to implement creative solutions to improve employee retention, such as building breakrooms in Asia, offering free feminine hygiene products in the Caribbean, and implementing flexible schedules for working parents in the United States.

There is a significant return opportunity with a base case IRR of 24% to 45% and an upside case IRR of 78%, assuming normalized growth over the next three years and execution of synergies following the Webhelp combination, according to Impactive.

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.