Starboard is looking for one other winner within the fintech house
Jeffrey Smith, CEO of Starboard Value LP and Chairman of Papa Johns International Inc.
Brendan McDermid | Reuters
Company: ACI Worldwide, Inc. (ACIW)
Business: ACI Worldwide, Inc. develops and markets software products and services designed to facilitate electronic payments. Its products and services are mainly used by financial institutions, retailers, billers and electronic payment processors in domestic and international markets.
Market value: $ 3.7 billion ($ 32.14 per share)
Percentage ownership: 9.0%
Average cost: $ 27.83
Activist Comment: Starboard is a very successful activist and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard recently achieved success in the electronic payments industry. The company filed a 13D with Green Dot Corp (GDOT) on February 3, 2020, realizing a return of 126.60% compared to 5.48% for the S & P500 over the same period.
Starboard believes that at ACIW there are operational and strategic opportunities to create shareholder value.
Behind the scenes:
ACI Worldwide has moved somewhat quietly from a small-cap company to a mid-cap company through a series of small acquisitions. As a result, it is one of the most underlooked companies in payments, an industry that is hot and growing and is experiencing a valuation expansion. Starboard got to know this industry well after investing in Green Dot, another payment company, earlier this year.
ACI has three main businesses and some additional “up-sell” software products. The first segment is the invoice payment product. This is the company’s back-end software that allows customers such as utilities or cable companies to send invoices and accept payments through various payment channels such as credit or debit cards, ACH, or wire transfers. All of this can be integrated into a desktop or mobile phone and has additional functions that the customer can implement, e.g. B. adding surcharges for credit cards. The second segment is the company’s core processing software for payments to retailers and merchants. ACI was the first company to develop this software. It includes a wide variety of payment processing software that can be used to route transactions from one point to another. These companies enable ACI to offer banks and retailers a comprehensive suite of solutions. The company’s third major segment consists of a newer suite of products called Real-Time Payments. These are newer forms of payment channels based on different technologies. In contrast to the typical payment channels such as credit cards, ACH and bank transfers, which can take several days to delete and transfer, banks can use this technology to access real-time payment networks. This business is not yet available in the US but is growing 20% annually internationally and that growth rate is accelerating.
The company has historically grown through acquisitions (18 in 20 years), but organic growth has stalled and margins are a little compressed. You are now at a point where management needs to increase margins from 25% to over 30% and bring organic growth to at least a mid-single digit. The company hired a new CEO in March and has already begun a bottom-up strategic review of the various business units. Additionally, he might very well be the right person to clean up this business and Starboard, as it has done in many other activist situations, could be very helpful at the board level.
If growth and margins don’t improve by next year, management may need to consider selling the company. There have been rumors of strategic interest from companies like FIS Global or Fiserv, or a large tech company like Microsoft – these companies could use ACI’s centralized payment processing software to expedite their own efforts. On top of that, there could also be private equity stakes – the thesis here would be to take the company private, clean up, sell its real-time payments and core processing businesses, roll up the remaining bill-payment business, and bring that business back on the stock exchange.
Like most good activists, Starboard likes situations where there is more than one way to create value. Generally, their engagements have a core operational path and a secondary strategic opportunity. This situation is no different in that it has an operational and strategic element. What’s different here, however, is that unlike most of Starboard’s previous campaigns, the greater opportunity for value creation here could be the strategic path.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. ACI Worldwide is a position in the fund.