Jana brought an aerospace rock star to Mercury Systems. These next steps could help build value
Business:
Mercury Systems
The company manufactures essential components, subsystems, modules, and products. The company sells to prime defense contractors, the U.S. Government and OEM commercial aerospace firms. Mercury Systems is a company that makes electronics for defense applications. Mercury Systems is exempt from the Truth in Negotiations Act, which requires disclosure of costs because it pays for their own research and developments. The company can have margins higher than 10%.
Stock Market Value
$2 B ($34.38/share)
Jana Partners, Activist
Percentage of Ownership
8.00%
Costs:
$36.30
Commentary by an Activist
Jana, founded by Barry Rosenstein in 2001, is an activist investor with a lot of experience. The firm gained its reputation by taking well-planned, deeply researched activist positions and implementing them with well-conceived long-term plans. Rosenstein called his activist approach "V cubed." The three Vs are (i) value - buying at the right prices; (ii), votes - knowing if you have the votes to begin a proxy battle; and (iii), variety of winning strategies – having multiple ways to increase value and exit a business. Since 2008, we have gradually changed our strategy. We now call it "the three Ss". (i.e. stock price: buying at the best price. (ii. strategic activism: selling a company or spinning off a business. (iii. star advisors/nominees: aligning yourself with industry leaders to provide advice and to take board seats when necessary.
What's happening?
Jana was married on July 6th.
Voting agreement
Mercury Systems
Scott Ostfeld was appointed
Jana's managing partner, has been appointed as a director to the board of directors. Jana also agreed to vote for the nomination slate of the company at the annual meeting of 2023, which includes Gerard J. DeMuro and Roger A. Krone. Both parties agreed on additional voting commitments. Bill Ballhaus was named Mercury Systems' interim CEO and president on July 6.
Behind the scenes
Mercury Systems is a manufacturer of small electronics components that has many positive attributes. The company's products are a crucial part of larger defence products, with the U.S. government and other governments being the ultimate purchaser. Mercury Systems, unlike its peers, pays for R&D itself, which makes it more agile and allows it to enjoy higher operating margins. The business grew at an annual average rate of 14 % between 2017 and 2020, with margins up to 23.2% for earnings before interest taxes, depreciation, and amortization in 2018. The company was unable to execute the development programs that were designed for the more complex sub assembly systems. Covid also happened at the same time and caused supply chain problems. Inefficiencies in production led to delivery delays and decreased profits. Margins also fell and growth stagnated. The company now aims for 16.5% EBITDA and a -1% growth.
Jana wasn't the only activist to notice this. Jana filed its 13D on December 23, 2021, wherein it called for an evaluation of corporate governance, operations and strategy. Starboard filed a 13D shortly after Jana. Starboard's 13D on the company was filed shortly after Jana's filing.
June 2022
Bill Ballhaus, Jana's CEO (Jana), and Howard L. Lance, Starboard's CEO (Starboard), each won a place on the board of directors. The company conducted a strategic review shortly afterward, which resulted in the signing of confidentiality agreements by 20 interested parties and the submission of two proposals. The board determined that these proposals would ultimately undervalue the business. The board decided to end the strategic review, and that it was better for the company to operate as a separate entity. Starboard and Jana both exited their 13Ds in 2023. Since Jana had exited the 13D, and before selling down the entire position of the firm, it named Jana's nominee as director.
Ballhaus
As interim president and chief executive officer. This led Jana to rebuild its position and engage with the company, as well as getting a seat on the board for Jana partner Scott Ostfeld. Since 2021, the majority of the board was reconstituted with the addition of Scott Ostfeld, and concurrent resignations. The CEO has also been replaced. Jana and Starboard were responsible for identifying three of the new directors, including Ballhaus, a person Jana is very familiar with.
Jana's association with Ballhaus dates back to 2015.
Computer Sciences activists
Jana orchestrated
Spin-off and sale
Bill Ballhaus, the CEO of SRA at that time, was responsible for Computer Sciences' government service unit. Ballhaus, with all due respect to Ozzy Osbourne, Steven Tyler and other rock stars, is a rockstar when it comes the aerospace, defense, and technology industries. He has also worked as a turnaround chief executive for many companies. Jana did the heavy lifting to get Ballhaus in the boardroom. After he made it to the C-suite the road ahead is clear. Clean up operations for the 12 development programmes that were negatively affecting the performance of the company, restore lost profitability, cashflow and market predictability and invest wisely in order to restore growth.
Mercury Systems remains a strategic asset. Twenty potential buyers were interested in Mercury Systems despite its operational problems - two even made an offer. The suitors are still watching the company and they will continue to do so as it is turned around by management. A future financial or strategic acquisition is still possible.
Ken Squire, founder and president, is an institution research service that focuses on shareholder activism. He also founded and manages the 13D Activist Fund - a mutual investment fund that invests in a 13D activist portfolio.