He’s baaaaaack!
Last March, Jeffrey Smith and his activist hedge fund firm, Starboard Value, reached a compromise agreement with Insperity. Under the deal, the Kingwood, Texas provider of human-resources services to small and mid-sized companies agreed to appoint two nominees from Starboard — including Starboard managing member Peter Feld — to its board of directors and promised to add at a later time a third nominated by Starboard and agreed-upon by the company.
The board also agreed to create an independent advisory committee to make recommendations to the board regarding capital allocation, expenses and targeted ranges for cash-flow margins.
“We believe the addition of new independent directors will bring a fresh perspective to the boardroom and we look forward to working constructively with the incumbent board members to enhance shareholder value,” said Feld at the time in a statement.
Nearly one year later Starboard, which owns 15.7 percent of the shares, is once again turning up the heat on Insperity, a relatively low-profile company with little more than a $1 billion market capitalization.
On March 12 the activist hedge fund firm nominated two additional individuals to Insperity’s board to be considered at its upcoming annual meeting and once again threatened to launch a proxy fight.
This is pretty unusual. It is rare to see an investor that has already obtained board representation seek more directors so soon.
In a regulatory filing Starboard acknowledges Insperity made progress over the past year. However, it argues that the stock is still undervalued and there is still more the company can do to improve its operations and corporate governance. “Starboard believes that the board can be further improved with directors who have direct industry experience in the HR outsourcing industry,” it added in the filing.
Insperity is led by chairman and chief executive officer Paul Sarvadi, who founded the company more than 28 years ago. President Richard Rawson has been a director since 1989 while A. Steve Arizpe, the executive vice president and chief operating officer, joined the company in 1989. Other key executives came aboard shortly afterward.
Starboard says its two new nominees “have relevant financial and operational experience having served as senior executives of successful HR outsourcing companies.”
One of the two is a one-time industry titan: John Murphy, a former senior vice president, chief financial officer and treasurer of Paychex, a large provider of payroll, human resources and benefits outsourcing services.
Starboard laments that this time the company rejected its settlement proposals, calling Insperity’s counterproposals “inadequate.”
“Starboard has engaged, and remains open to continuing to engage, with the board and management to reach a mutually agreeable resolution that would avoid the need for an election contest at the 2016 annual meeting,” Starboard warned.
Why is a Starboard that seemed happy a year ago now threatening a proxy fight?
Keep in mind that last Saturday was the deadline for submitting nominees to Insperity’s board to be considered at its annual meeting. So, at least Starboard submitted its nominees on time.
A number of people involved in the situation suggest that the two sides could reach a compromise deal, especially given that the company has still not even scheduled its annual meeting. So the clock is not a huge factor.
Since the March 2015 compromise deal was announced, Insperity’s stock is mostly unchanged. However, it has nearly doubled since its low in October 2014.
In the past year the company has cut costs, raised its dividend and bought back stock. It also sold its two jets, one of Starboard’s earlier demands.
Jeffrey Martin, who follows the stock for Newport Beach, California-based Roth Capital Partners, says Starboard got into the stock at a good time. “Insperity has strategically positioned the business to grow at double-digit rates,” says the analyst, who has a Buy rating on the shares.
He says that last year Insperity lifted its client retention rate several percentage points and is poised to boost it again this year. It has also made a significant investment in its sales force, which is starting to pay off.
“What it has done is not of Starboard’s influence,” Martin says, noting that last year the board was receptive to Starboard. “But I don’t think Starboard played a big role in its strategy or operating improvements.”
He does credit Starboard for getting the company to sell its corporate jets—but not much more.
James MacDonald, who follows the stock for First Analysis Securities Corp. and recently raised its rating on the stock to Outperform, thinks Starboard is still hoping for some sort of agreement with the company.
Starboard declined to comment.
In a statement, Insperity acknowledges receiving the nomination of the two candidates, adding: “Prior to receiving this notice, Insperity has been engaged in discussions with Starboard, which Insperity expects to continue, and hopes to reach a reasonable resolution that is in the best interests of all stockholders. Consistent with its normal practice, the nominating and corporate governance committee of the board will review any proposed nominees at the appropriate time and will make a recommendation to the board and stockholders in advance of Insperity’s 2016 annual meeting.”
Martin thinks Starboard’s latest move to nominate two directors is designed to take over the board and then put the company up for sale. Insperity has a staggered board in which three directors come up for election each year.
He says members of management have told him that they thought Starboard was a big distraction last year. “They want to get back to focus on running the business,” he adds.
If Starboard has its way, Insperity will be focusing on the addition of two more industry veterans on the board.
