This unusual technology play has a significant potential for growth, according to Jana, who sees it serving industries such as construction.

Company: Trimble (TRMB)

It offers technology solutions that enhance work processes for professionals and mobile workers in four segments: Buildings and Infrastructure, Geospatial, Resources and Utilities, and Transportation.

Stock Market Value: $12.88 billion ($51.77 a 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 their 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, Jana has shifted their strategy to a three-pronged approach, which they call the "three Ss": stock price, strategic activism, and star advisors/nominees.

What’s happening:

JANA Partners declared on December 11, 2023, that they have acquired a stake in Trimble Inc and urged the Company to halt its M&A activities and concentrate on organic growth in its existing businesses.

Behind the scenes:

Trimble, founded in 1978 as a GPS technology company for agriculture, expanded into the construction industry in the 2000s with the acquisition of Spectra Precision. Over the past decade, the company has spent $5 billion on acquisitions, primarily buying software businesses to provide an interconnected hardware and software product. In 2012, Trimble acquired SketchUp from Google and continued to expand its Building Information Modeling portfolio with the acquisition of Tekla in 2014. In 2016, the company acquired Sefaira, a software for sustainability analysis including energy modeling and daylight visualization. More recently, Trimble acquired Viewpoint, a leading provider of construction management software, for $1.2 billion in 2018 and launched Trimble MAPS, consolidating several of its previous acquisitions. Today, Trimble offers hardware and software solutions in under-tech served industries such as construction, transportation, forestry, and agriculture.

The company's acquisitions of multiple software have resulted in a positive change in their business mix. In 2011, software and services that are recurring and generate higher revenue accounted for 16% of their revenue. By 2024, this percentage will exceed 50%. Despite this positive change in their business mix, the company's stock has underperformed significantly over the past three years, with a 50% underperformance compared to the S&P 500.

Trimble's recent history of software M&A activity has contributed to their underperformance. They have been acquiring companies for 30 to 40 times EBITDA, while the acquired companies are being valued at Trimble's EBITDA multiple of 14 times EBITDA. The market has reacted negatively to their acquisitions, as evidenced by their April 2023 acquisition of Transporeon for 30 times EBITDA, which resulted in a 6.5% drop in their stock price. Despite their new product mix, Trimble is not getting credit for it, with a re-rating to a higher software multiple. If they can get in line with peers, Jana sees a potential stock upside of over 40%.

Jana suggests that the company should prioritize its core business by halting M&A activity and aligning executive compensation with return on invested capital instead of revenue growth targets. She also sees an opportunity to enhance operations and profit margins, despite the company's 800 basis point increase in gross margins over the past eight years, which resulted in only a 500 basis point increase in EBITDA margins. Lastly, Jana proposes simplifying the business structure, as evidenced by Trimble's recent joint venture with AGCO Corporation, which resulted in a positive market reaction despite a lower EBITDA margin increase compared to Trimble's past acquisitions.

The company's history of value-destroying M&A presents an ironic opportunity for Trimble to be acquired by a larger industrial company seeking a product mix with more software. Trimble's greater than 50% software mix and lower EBITDA multiple make it an attractive asset for many large industrial companies.

Jana frequently initiates activist campaigns with a team of seasoned industry executives who could potentially serve as board nominees if required. Although we believe they have connections to such executives, there has been no official announcement regarding their recruitment, which suggests that it is too early to determine if this campaign will be escalated. However, we will not have to wait long. The director nomination window opens on February 2, 2024, at which time we will gain more insight into the direction of this campaign.

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.