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

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Activist Commentary: Jana is a very experienced activist investor founded in 2001 by Barry Rosenstein. They made their name taking deeply researched activist positions with well-conceived plans for long term value. Rosenstein called his activist strategy “V cubed”. The three “Vs” were” (i) Value: buying at the right price; (ii) Votes: knowing whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, they have gradually shifted that strategy to one which we characterize as the three “Ss” (i) Stock price – buying at the right price; (ii) Strategic activism – sale of company or spinoff of a business; and (iii) Star advisors/nominees – aligning with top industry executives to advise them and take board seats if necessary.

On December 11, 2023, JANA Partners announced that they have taken a position in Trimble Inc and are calling on the Company to cease M&A activities and instead focus on organic growth in its existing businesses

Trimble started in 1978 as a GPS technology company, primarily for agriculture. In the 2000s it entered the construction industry with its acquisition of Spectra Precision. It continued growing through acquisition and over the past 10 years has spent $5 billion on acquisitions, primarily buying software businesses with the goal of providing an interconnected hardware and software product. In 2012, they acquired the 3D modeling software package SketchUp from Google and continued to expand their Building Information Modeling portfolio with the acquisition of Tekla in 2014. In 2016, Trimble acquired Sefaira, a software for sustainability analysis including energy modeling and daylight visualization. More recently, in 2018, Trimble acquired Viewpoint (a leading provider of construction management software) from Bain Capital for $1.2 billion, and in 2019 launched Trimble MAPS, consolidating several of its previous acquisitions. They now offer hardware and software solutions in under-tech served industries such as construction, transportation, forestry and agriculture.

The company’s multiple software acquisitions have led to their mix changing in a very positive way. In 2011, 16% of their revenue came from software and services that are by their nature recurring and higher multiple revenue. In 2024, it will be more than half. However, while the business mix has transformed for the better, during this time the stock has significantly underperformed – over the past three years, the stock has underperformed the S&P 500 by nearly 50%.

A lot of this underperformance can be tied to their recent history of software M&A activity. They have been buying companies for 30 to 40 times EBITDA and the acquired companies are being valued at Trimble’s EBITDA multiple of 14 times EBITDA inside of Trimble. The market understands this and as a result, has reacted negatively to their acquisitions, as recently evidenced by their April 2023 acquisition of Transporeon (a cloud-based transportation management platform) for 30 times EBITDA. After the deal was announced, the company’s stock dropped 6.5%. Trimble is not getting credit for their new product mix with a re-rating to a higher software multiple. This does not mean 30 to 40 times EBITDA, but industrial technology peers trade in the mid-teens to mid-20s.  If they can get in line with peers, Jana sees a stock upside of over 40%.

The first thing Jana would like the company to do is cease M&A activity and focus on the core business. To do this, the board should tie executive compensation to return on invested capital, instead of the current compensation structure which incentivizes revenue growth targets. Second, Jana sees an opportunity for the company to focus on improving operations and profit margins. Over the past eight years of increasing software product mix the company has expanded its gross margins by approximately 800 basis points, yet they have expanded their EBITDA margins by only 500 basis points (1 basis point equals 0.01%). There is an opportunity to better integrate these acquisitions and improve operating margins. Lastly, this is a complicated business structure that could benefit from a simplification. This past September, Trimble announced that it entered a joint venture with AGCO Corporation (AGCO) (a worldwide manufacturer and distributor of agricultural machinery and Precision Ag technology), whereby AGCO will acquire an 85% interest in Trimble’s portfolio of Ag assets and technologies for $2.0 billion. This got the opposite market reaction than when Trimble acquires companies, sending Trimble’s stock price up 6.5%.

While their primary objective here is to have the company stick to the core business and cease their M&A activity, there is another ironic opportunity here, and that is the M&A opportunity created by the company’s history of value destroying M&A. Trimble could be an attractive acquisition target for a larger industrial company who also wants a product mix with more software but has the discipline not to pay 30 to 40 times EBITDA for software companies. With a greater than 50% software mix and a much lower EBITDA multiple, Trimble would be an attractive asset for many large industrial companies.

Jana often launches activist campaigns with a team of experienced industry executives ready to be board nominees if necessary. While we assume they have connections to such executives, there has been no announcement that they have recruited any, which means to us that it is too early to tell if this will be escalated. However, we will not have to wait that long. The director nomination window opens on February 2, 2024, at which time we will have more clarity on which road this campaign will take.

Ken Squire is 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.