Business: Quotient Technology operates as a digital media and promotions technology company that offers power integrated digital media and promotions programs for brands and retailers. The company operates through two segments: (i) Promotions segment, which offers digital coupons and (ii) Digital Media segment, which provides targeted ads to customers. The company has built some of the most valuable customer shopping data insights with industry leading technology, allowing it to effectively work with over 800 Consumer Packaged Goods (CPG) companies and many top retailers.

Stock Market Value: $689.2M ($7.30 per share)

Percentage Ownership: 6.47%

Average Cost: $6.46

Activist Commentary: Engaged Capital was founded by Glenn W. Welling, a former principal and managing director at Relational Investors. Engaged is an experienced and successful small cap investor and makes investments with a two-to-five-year investment horizon. Its style is holding managements and boards accountable behind closed doors. Engaged has been an investor in Quotient since the end of 2020, taking profits when the stock has soared and buying more when it dropped back down.

On Nov. 17, 2021, Engaged sent a letter to the board highlighting the company’s relative underperformance to peers, poor corporate governance practices and operating issues. Additionally, Engaged requested an exemption from the company’s recently announced tax benefits preservation plan, which becomes exercisable if a shareholder acquires beneficial ownership above 4.9%, to allow Engaged to acquire beneficial ownership up to 9.99%.

This is an industry that is experiencing obvious secular tailwinds as coupons and advertising continues to shift from paper to digital and as e-commerce expands. These tailwinds have only been magnified by the Covid environment. However, the company has had consistently poor performance — in the most recent quarter, the company cut its guidance and reported losing one of its largest partners, Albertsons. Over the past four years, the company has consistently missed meeting quarterly guidance. As a result, over the past five years, the company has underperformed peers by over 500%, is trading close to all-time lows and has underperformed the S&P 500 on 1-, 3-, and 5-year periods by -27.91%, -112.25% and -152.87%, respectively.

The problem with Quotient is similar to many other activist targets: It is a public company still being run by its founder like a private company with a bloated cost structure and horrendous corporate governance. The obvious signs of poor corporate governance are all there – staggered board, combined chairman/CEO, plurality voting in uncontested elections, etc. – all things that most companies have done away with years ago. However, the two more blatant examples of an entrenched board are (i) the company instituting a 4.9% net-operating-loss poison pill at the same time that Engaged is buying its position – Quotient has always had significant NOLs and has never had an NOL pill, but suddenly feels the need for one immediately without a shareholder vote the same time an activist shows up; and (ii) replacing a resigning director with a new director by putting the new director in a class that is not up for election until 2024 and decreasing the number of directors up for election this year from three to two. Good corporate governance would dictate that the new director is voted on as soon as possible, particularly if it does not mean changing the class. There is no reason for this change other than to make it harder for shareholders to materially change the composition of the board.

This bad corporate governance is not just an academic issue – it is a practical issue for shareholders as it has led to a leadership issue, a failed succession plan and horrible margins. Steve Boal is the founder, chairman/CEO of the company and has been since 1998. Boal stepped away as CEO in 2017 but remained chairman and took the reins back as CEO just two years later, never really giving his replacement, Mir Aamir, a fair chance at success. Through all of this, the company is down about 53% from its 2014 IPO price and is guiding EBITDA margins of 7% to 8% versus 35%+ margins for similar AdTech businesses.

There are two options here to create shareholder value: (i) bring in a new management team with deep digital ad experience to run the business more efficiently for shareholders, or (ii) sell to a strategic investor with a management team that can better manage this business – it has been rumored that there has been interest in the company but management has been unwilling to engage. Either one is not a good scenario for Steve Boal.

The question is how do you accomplish either of those tasks with an eight-person entrenched board with only two directors up for election this year? Well, there is a way, and Engaged has done it before. Engaged faced almost the exact situation in its 2017 activist campaign at Rent-A-Center – founder/chairman/CEO Mark Speese gave up the role as CEO in 2014, retained the role of chairman and took back the CEO role three years later in 2017. Engaged nominated a full slate of three directors to the staggered board that same year, won the proxy fight and removed three incumbent directors, including chairman/CEO Mark Speese. Six months later, Speese resigned as CEO.

Interestingly, of the two seats up for election at Quotient this year, one of them is chairman/CEO Steve Boal. Do you think Engaged will hesitate to follow the Rent-A-Center playbook here? The numbers speak for themselves – over its 4½-year activist campaign at Rent-A-Center, Engaged made a 238.01% return versus 85.33% for the S&P 500 over the same time period. Having said all of this, it goes without saying that there is no chance that the company grants Engaged an exemption to acquire up to 9.99% of the company’s common stock. 

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.