Jana sees big upside in this unusual technology play serving industries like construction

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Activist Commentary: Jana is a really skilled activist investor based in 2001 by Barry Rosenstein. They made their title taking deeply researched activist positions with well-conceived plans for long run worth. Rosenstein known as his activist technique “V cubed”. The three “Vs” have been” (i) Value: shopping for on the proper worth; (ii) Votes: understanding whether or not you might have the votes earlier than commencing a proxy struggle; and (iii) Variety of the way to win: having a couple of technique to boost worth and exit an funding. Since 2008, they’ve regularly shifted that technique to 1 which we characterize because the three “Ss” (i) Stock worth – shopping for on the proper worth; (ii) Strategic activism – sale of firm or spinoff of a enterprise; and (iii) Star advisors/nominees – aligning with high trade executives to advise them and take board seats if vital.

On December 11, 2023, JANA Partners introduced that they’ve taken a place in Trimble Inc and are calling on the Company to stop M&A actions and as a substitute give attention to natural progress in its current companies

Trimble began in 1978 as a GPS technology firm, primarily for agriculture. In the 2000s it entered the construction trade with its acquisition of Spectra Precision. It continued rising via acquisition and over the previous 10 years has spent $5 billion on acquisitions, primarily shopping for software program companies with the aim of offering an interconnected {hardware} and software program product. In 2012, they acquired the 3D modeling software program package deal SketchUp from Google and continued to increase their Building Information Modeling portfolio with the acquisition of Tekla in 2014. In 2016, Trimble acquired Sefaira, a software program for sustainability evaluation together with vitality modeling and daylight visualization. More lately, in 2018, Trimble acquired Viewpoint (a number one supplier of construction administration software program) from Bain Capital for $1.2 billion, and in 2019 launched Trimble MAPS, consolidating a number of of its earlier acquisitions. They now supply {hardware} and software program options in under-tech served industries equivalent to construction, transportation, forestry and agriculture.

The firm’s a number of software program acquisitions have led to their combine altering in a really optimistic manner. In 2011, 16% of their income got here from software program and providers which can be by their nature recurring and better a number of income. In 2024, it is going to be greater than half. However, whereas the enterprise combine has remodeled for the higher, throughout this time the inventory has considerably underperformed – over the previous three years, the inventory has underperformed the S&P 500 by practically 50%.

Plenty of this underperformance may be tied to their latest historical past of software program M&A exercise. They have been shopping for firms for 30 to 40 occasions EBITDA and the acquired firms are being valued at Trimble’s EBITDA a number of of 14 occasions EBITDA inside Trimble. The market understands this and because of this, has reacted negatively to their acquisitions, as lately evidenced by their April 2023 acquisition of Transporeon (a cloud-based transportation administration platform) for 30 occasions EBITDA. After the deal was introduced, the corporate’s inventory dropped 6.5%. Trimble shouldn’t be getting credit score for his or her new product combine with a re-rating to a better software program a number of. This doesn’t imply 30 to 40 occasions EBITDA, however industrial technology friends commerce in the mid-teens to mid-20s.  If they’ll get in line with friends, Jana sees a inventory upside of over 40%.

The very first thing Jana would like the corporate to do is stop M&A exercise and give attention to the core enterprise. To do this, the board ought to tie government compensation to return on invested capital, as a substitute of the present compensation construction which incentivizes income progress targets. Second, Jana sees a possibility for the corporate to give attention to bettering operations and revenue margins. Over the previous eight years of accelerating software program product combine the corporate has expanded its gross margins by roughly 800 foundation factors, but they’ve expanded their EBITDA margins by solely 500 foundation factors (1 foundation level equals 0.01%). There is a chance to higher combine these acquisitions and enhance working margins. Lastly, this is a sophisticated enterprise construction that would profit from a simplification. This previous September, Trimble introduced that it entered a three way partnership with AGCO Corporation (AGCO) (a worldwide producer and distributor of agricultural equipment and Precision Ag technology), whereby AGCO will purchase an 85% curiosity in Trimble’s portfolio of Ag belongings and applied sciences for $2.0 billion. This obtained the other market response than when Trimble acquires firms, sending Trimble’s inventory worth up 6.5%.

While their major goal right here is to have the corporate keep on with the core enterprise and stop their M&A exercise, there’s one other ironic alternative right here, and that’s the M&A chance created by the corporate’s historical past of worth destroying M&A. Trimble could possibly be a gorgeous acquisition goal for a bigger industrial firm who additionally desires a product combine with extra software program however has the self-discipline to not pay 30 to 40 occasions EBITDA for software program firms. With a higher than 50% software program combine and a a lot decrease EBITDA a number of, Trimble can be a gorgeous asset for a lot of massive industrial firms.

Jana typically launches activist campaigns with a staff of skilled trade executives able to be board nominees if vital. While we assume they’ve connections to such executives, there was no announcement that they’ve recruited any, which implies to us that it’s too early to inform if this might be escalated. However, we won’t have to attend that lengthy. The director nomination window opens on February 2, 2024, at which period we may have extra readability on which highway this marketing campaign will take.

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