 "Cognizant's strategy 20 yr old, needs to reinvent itself: Elliott")
The activist investor Elliot Management Corporation, which has called for a rejig in Cognizant Technology Solutions Corporation (Cognizant, a US-based company) board and policies. It pointed that Cognizant follows the offshore model and has not changed its strategy for over two decades and needs to reinvent itself.
Elliott owns over four per cent of Cognizant shares, making it one of the top four shareholders of the company.
Cognizant has been maintaining operating margins of around 19-20 per cent, however, follows its offshore model of re-investing the earnings back in business than rewarding shareholders
Elliot pointed toward Cognizant’s India rivals such as Infosys and TCS, who have been maintaining higher margins and returning cash to shareholders since 2010 at substantially higher rate than that of Cognizant.
Elliot also pointed that Cognizant has higher percentage of cash on its balance sheet - 54 per cent as against Infosys's 21 per cent and TCS's 24 per cent.
"The Cognizant Board of Directors and management team regularly review the Company's strategic priorities and opportunities towards the goal of enhancing value for all shareholders," it said in a statement.
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"Despite this leading position, however, Cognizant's stock price performance tells the story of deep underperformance across all relevant benchmarks, including its closest peers, over all time periods during the last five years. Over the last five years, Cognizant has underperformed its core IT services peers by 83 per cent despite growing revenue at a 22 per cent CAGR against the peer average growth of a 16 per cent CAGR over the most recent five fiscal years," said Elliott.
The gross margin of the company is at 40.1 per cent, compared to 45.3 per cent of TCS and 39.8 per cent of Infosys. However, the operating margins are comparatively lower at 18 per cent, much below the 26.6 per cent expected for TCS, 25.4 per cent for Infosys, 20.3 per cent for HCL and 18.5 per cent for Wipro.
The investor suggested a Cognizant Value-Enhancement Plan suggestion that the company can achieve a value of $80-$90+ per share by the end of 2017, representing upside of 50 per cent to 69 per cent in just over a year. This level of value creation is unique in today's market for any company, much less one with a more than $30 billion market capitalization.
Nasdaq-listed Cognizant said it held talks with Elliott and will review the "letter carefully and will respond in due course."
The shareholder ire came at a time when Cognizant is facing multiple internal fractures like the company has begun an internal bribery probe over possible violations of US anti-corruption laws, a leadership change after the untimely exit of its President Gordon Corbon and business challenges due to economic uncertainty that has forced it to cut its annual revenue forecast twice in the year.
