Rapid7 has a cybersecurity activist, Jana, invested in the company. Two strategies can increase value at the company.

Company: Rapid7 (RPD)

Rapid7 is a global cybersecurity software and services provider that offers a range of products for information security, cloud operations, development, and information technology teams. Its flagship offering, Rapid7 Managed Threat Complete, includes the Rapid7 Managed Detection and Response program, as well as risk and threat coverage through InsightIDR and Insight VM services. This comprehensive security solution helps more than 11,000 global customers manage cloud risk and detect threats.

Stock Market Value: $2.69B ($43.23 per share)

Activist: Jana Partners

Percentage Ownership:  n/a

Average Cost: n/a

Jana, founded in 2001 by Barry Rosenstein, is a highly experienced activist investor known for its well-researched positions and long-term value plans. Rosenstein's activist strategy, dubbed "V cubed," focused on three key elements: value, votes, and variety of ways to win. Since 2008, the firm has shifted its strategy to a three-pronged approach, which includes buying at the right stock price, engaging in strategic activism, and aligning with top industry executives through star advisors and nominees.

What's happening

On June 26, The Wall Street Journal reported that Jana has assumed a substantial stake in Rapid7 and may push the company to sell itself, enhance operations, and enhance forecasting.

Behind the scenes

Rapid7 is a cybersecurity company that enhances its clients' security operations by providing end-to-end 24/7 managed detection and response with vulnerability management offerings. Historically, the company has focused on on-site cybersecurity operations, but it has recently expanded into the growing area of cloud security. The industry is highly attractive, and Rapid7 benefits from tailwinds such as the increasing demand for cybersecurity services and the limited availability of cybersecurity analysts and internal security staff. With the threat of cyberattacks looming large and software budgets being cut or reallocated, there is a need for outsourcing. Rapid7 is well-positioned to continue growing and aims to be a high-quality provider for subject matter experts who may not be able to retain the services of their largest and most expensive competitors.

Despite its favorable position, Rapid7 has delivered negative returns on a one-, three-, and five-year basis. The company is one of three main players in vulnerability management, yet it's assigned a much smaller revenue multiple (3x) compared to peers Tenable (5.5x) and Qualys (8x). Rapid7 offers a combination of low- and high-growth cybersecurity offerings, which is difficult to value, but more important are the multiple slip-ups by management, exacerbated by a lack of oversight by the board. The company has undergone changes to its sales model, including a shift to selling packaged products from selling offerings individually. It has also moved to a channel model from direct. Rapid7 has encountered challenges in bringing its cloud product to market. To shift from pure growth to a profitable software company, the company has focused on meeting targets for $160 million in free cash flow and improved margins. In August 2023, the company abruptly announced plans to reduce its staff by 18%. Rapid7 has had further retention problems in key executive roles, including the departure of its chief innovation officer and its critically important chief operating

Jana generally follows two paths to create shareholder value: a long-term plan or a shorter-term plan to sell the company. With respect to the long-term plan, Jana works with industry executives and consultants to perform due diligence and implement its activist plans. The firm often brings these individuals to the table to serve as director nominees. Jana has extensive experience in strategic activism and getting portfolio companies sold. The firm will advocate for the strategy it expects will maximize shareholder value on a risk- and time-adjusted basis. Given the problems the company has been experiencing and the lack of CEO focus, a sale looks like the easier and more certain path if there is a suitor at the right price.

If Jana advocates for a sale of Rapid7, it will ask the board to do it through a full sales process that attains the highest value for shareholders. Jana has a strategic partnership with Cannae Holdings, which could be helpful in providing the equity in a strategic transaction with a private equity firm. However, even if Jana thinks a sale of the company is the best way to optimize shareholder value, the firm will still have to get the board to agree. If the board and management team do not agree to a sale, Jana's remedy would be to launch a proxy fight, but that could take some time. The director nomination window does not open until Feb.13, 2025, after the 2024 annual meeting passed on June 13.

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.