Elliott Management Corporation (“Elliott”), which manages funds
that collectively beneficially own 8.6% of the common stock and
equivalents of CDK Global, Inc. (NASDAQ: CDK) (the “Company or
“CDK”), today sent a letter to the Board and Management of CDK. The
letter outlines the positive reactions that Elliott has received
from shareholders in response to the Value-Maximizing Plan laid out
in its letter of May 4th.
The May 4th letter can be viewed at
http://elliott-graphics.com/CDKletter.html. Today’s letter can be
viewed at http://elliott-graphics.com/CDKletter2.html.
Full text of the letter follows:
June 8, 2016
The Board of DirectorsCDK Global, Inc.1950 Hassell RoadHoffman
Estates, IL 60169Attn: Chairman Leslie BrunAttn: CEO Brian
MacDonald
Dear Les, Brian and Members of the Board:
I am writing to you again on behalf of Elliott Associates, L.P.
and Elliott International, L.P. (together, “Elliott” or “we”),
which collectively beneficially own 8.6% of the common stock and
equivalents of CDK Global, Inc. (NASDAQ: CDK) (the “Company” or “CDK”),
making us one of the Company’s largest shareholders.
First, we would like to thank Les, Brian and Al for the ongoing
positive dialogue and for taking time to discuss the
“Value-Maximizing Plan” (or the “Plan”) we laid out in our letter
of May 4th. We also appreciate the constructive discussion we have
had with your advisors. We recognize that your time is valuable,
and we look forward to continuing our discussions about how best to
maximize shareholder value at CDK.
When we publish a letter publicly, we generally receive numerous
calls from shareholders wishing to share their views and learn more
about ours. Shareholders nearly always inquire about the views of
other owners, about management’s views as we understand them, and
about the progress of our dialogue with the Company. Today’s letter
is in response to these numerous inquiries from our fellow owners
and summarizes for the benefit of both the Board and other
shareholders the dozens of conversations we have had since our last
letter of May 4th. We hope by sharing this information with the
Company and our fellow shareholders we can work toward the best
path forward for CDK.
The key takeaways from the several dozen calls we received in
response to our letter are that 1)
shareholders overwhelmingly believe that CDK should seize this
opportunity to both improve operating performance and return
capital, and 2) shareholders are awaiting clarity from the Company
on its willingness to act swiftly on these
opportunities.
After having discussions with shareholders that together represent more than half of CDK’s shares
outstanding, we ask that CDK adopt the steps in the
Value-Maximizing Plan without delay. Not only would the Plan
create sustained improvements in
shareholder value, but it would also create a better company for employees and
customers.
Shareholders Have Embraced the Value-Maximizing Plan
Over the last month, we have exchanged views on CDK with many in
the investment community, including a majority of CDK shareholders.
While we had already spoken to many CDK shareholders since
initially investing in the Company over a year ago, we received an
influx of calls after our letter was published in early May from
both long-standing shareholders and new shareholders who had
recently acquired CDK stock.
Below are quotes from our discussions with CDK’s top
shareholders:
“Our fund is really glad you sent that
letter. It made a bunch of good points – per our last call, our
analysis shows margins can be around 45% in fiscal ‘18 if the right
actions are taken, and the buyback recommendation is just a
no-brainer.” – Top 10 Shareholder
“Shareholders generally think CDK should take
the steps you proposed – the question is does management actually
understand this and are they willing to do what shareholders want
here.” – Top 10 Shareholder
“We told management that we were supportive
of your letter. We think the right margin target could be much
higher than the 42% in the letter and that this business can
comfortably support leverage of at least 4.0x as a public company.”
– Top 10 Shareholder
“They have a small board. Do you think they
will add some more directors? Would probably be helpful to get some
folks with software experience on there. Directors who are more
familiar and comfortable with the space may help speed up the pace
of margin improvement.” – Top 10 Shareholder
“These guys [CDK] aren’t doing anything on
capital return front – the ASR they are doing is peanuts. The
company is under-levered and throws off a fair amount of U.S. cash
flow. They should be buying back as much stock as they can now and
formalizing a better [capital return] program.” – Top 20
Shareholder
“Do you think they [CDK] will do the right
thing here and put out a plan in line with your letter? Often we
see companies take “half-measures” to try and get shareholders off
their back rather than truly engaging and creating the best
possible plan today.” – Top 20 Shareholder
“Hopefully, CDK will look at your letter as
an opportunity to improve their plan. I don’t want to hear from
them that they will figure out a better plan once they get to 35%
margins. I think we both agree that management shouldn’t be
figuring out the plan as they go along – they should set the
appropriate goals today so they can immediately start planning and
implementing steps that will lead them to hitting the higher
targets in a couple of years.” – Top 20 Shareholder
“The point in the letter that there are
positive business implications to moving quickly to getting to the
optimal margin profile rather than a slow, ongoing restructuring
really made sense to me.” – Top 20 Shareholder
“I agree with an over 40% margin target in
fiscal ‘18 here, but I think we need to ensure management
incentives are aligned to get there. I think management should get
paid handsomely if they hit the 42% margin target in ’18; that is
the best way to ensure good execution so that they don’t try and
push out the targets for a few years.” – Top 20 Shareholder
“Based on our modeling, the stock is going to
at least $90 if they fully take advantage of the cost savings and
buyback options they have. The upside is so great it makes no sense
not to do this. We are betting they eventually get there – one way
or another.” – Top 25 Shareholder
After our conversations with shareholders owning a majority of
CDK, it is clear that shareholders believe more can and should be done to improve CDK’s business
operations and capital return program. As we conveyed to the
Board previously, CDK’s shareholders strongly support the Company
taking the recommended actions without delay, and several
shareholders have told us that they have communicated this message
to management directly.
While we received a great deal of feedback from the investment
community, the most common question we
received from CDK’s owners is whether the Board and management team
are on the same page as shareholders in their willingness to
implement the changes necessary to realize CDK’s potential.
Specifically, CDK’s shareholders want to know whether CDK’s Board
and management will adopt the Value-Maximizing Plan. Our response
to them has been that we hope so, but our sentiments are no
substitute for a strong signal from the Board and management team
that you understand the urgency and plan to provide shareholders
with a roadmap shortly.
In addition to our fellow shareholders calling us, we have also
received inbounds from a number of other Wall Street participants,
including private equity buyers, strategic partners, investment
banks and other financing sources, that called us to express
interest in CDK. We believe this verifies the view that multiple
value-unlocking pathways exist. Credit markets are now functioning
at favorable levels with available financing at attractive terms –
but this market strength will not last indefinitely. It is
critically important that CDK evaluate all of its options now while
the financing markets are still strong.
The Value-Maximizing Plan Will Also Benefit CDK’s
Customers
One of the most attractive aspects of CDK’s business is its very
loyal customer base, defined by an average DMS client tenure of 20
years. We have had the opportunity to spend a meaningful amount of
time understanding the viewpoints of loyal customers, former
employees, and other industry participants. Our survey of numerous
customers and industry participants confirmed that CDK is a leader
in the DMS industry with a mission-critical product and service
function. As large shareholders, we strongly believe that CDK’s
commitment to its customers must be unwavering.
However, our diligence has confirmed what many shareholders
already suspected: Some of the business
issues that have led to shareholder discontent have also
resulted in numerous organizational and quality-control issues
affecting customers. The affected areas include product
development and innovation, as well as critical service
functions.
The good news is that many of the same steps entailed in the
Value-Maximizing Plan will have the salutary effect of helping CDK
maintain its industry-leading customer support and product
innovation engine. Specifically, we believe that:
- Reducing product complexity will
shorten product implementation times.
- Enhanced leveraging of technology and
automation will reduce customer response times.
- Improved software version discipline
will free up funds for higher overall product quality and a better
customer experience as a greater proportion of R&D spend would
be committed to new features rather than simply maintaining older
products.
- Implementing an automated contracting
system will deliver a simplified, more transparent set of invoices
for customers.
Implementing these value-maximizing
steps will not only create a more streamlined business for
shareholders but will also ensure that CDK can continue to deliver
enhanced customer satisfaction, take share in a competitive market
and grow.
The goals of a more effective business for customers and a more
efficient one for shareholders are completely aligned. We are
confident that CDK can be a better business, period – one that will
drive growth, maintain and improve loyalty, and ultimately create
compounding value for years to come.
Next Steps
We are gratified by the breadth of support expressed for the
recommendations presented in our last letter, and we share the
consensus view that CDK’s management team and Board should embrace
this opportunity to announce and implement our proposed
Value-Maximizing Plan immediately:
1. Improved Operations: This would include a full
operational review of the business, which will lead to streamlined
and improved operations with a 42% FY2018 EBITDA Margin. It would
also include a strong and unambiguous public commitment to
executing upon this plan in a targeted but decisive manner, with
changes to be made promptly. The Company’s commitment would be
clearly communicated via regular progress updates to shareholders.
2. Enhanced Capital Return: CDK would accelerate its capital return
plan by committing to repurchase $1.0 billion of stock through the
end of calendar year 2016 funded with new debt and balance-sheet
cash as well as announce a new long-term capital return plan
comprised of ongoing buybacks funded by both cash proceeds
generated by maintaining a 3.0x net leverage target and returning
65% of annual free cash flow.
We continue to believe that this plan, if fully implemented,
should result in CDK’s share price
reaching $81 or higher within 14 months. This price
would represent an increase of at least 72% to the share price
prior to the release of our last letter (and at least 43% from
today’s price). This plan is entirely achievable in a timely
fashion and, as laid out above, would result in not only a higher
stock price but also a more productive business and an improved
product offering and service experience for customers.
We very much appreciate the Board and management’s time in
considering our thoughts. We have enormous respect and admiration
for CDK’s high-quality business model and its technology, products
and competitive position. However, we must
reiterate that shareholder frustration is incredibly high due to
both a lack of progress and a lack of clarity.
Shareholders are frustrated with the limited progress on margin
improvement and capital return since the Company separated from
ADP. The lack of progress to date was reinforced on CDK’s last
earnings call, when only $50 million of savings were targeted for
all of FY2016 (representing only 2-3% of CDK’s $1.7 billion expense
base) and no update was provided on a capital return plan.
We see no reason for shareholders to remain in the dark
regarding the plans of management and the Board. We are firmly
committed to CDK as active shareholders with a large investment to
protect, and we look forward to continuing our dialogue with Les,
Brian, Al and the new leadership team. We hope that the Board and
management believe, as we and other shareholders do, that now is
the time to take action.
As always, we welcome the opportunity to answer any questions
you may have.
Best regards,Jesse CohnSenior Portfolio Manager
Cautionary Statement Regarding Forward-Looking
Statements
The information herein contains “forward-looking statements.”
Specific forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts and
include, without limitation, words such as “may,” “will,”
“expects,” “believes,” “anticipates,” “plans,” “estimates,”
“projects,” “targets,” “forecasts,” “seeks,” “could,” “should” or
the negative of such terms or other variations on such terms or
comparable terminology. Similarly, statements that describe our
objectives, plans or goals are forward-looking. Our forward-looking
statements are based on our current intent, belief, expectations,
estimates and projections regarding the Company and projections
regarding the industry in which it operates. These statements are
not guarantees of future performance and involve risks,
uncertainties, assumptions and other factors that are difficult to
predict and that could cause actual results to differ materially.
Accordingly, you should not rely upon forward-looking statements as
a prediction of actual results and actual results may vary
materially from what is expressed in or indicated by the
forward-looking statements.
About Elliott
Elliott Management Corporation manages two multi-strategy hedge
funds which combined have approximately $28 billion of assets under
management. Its flagship fund, Elliott Associates, L.P., was
founded in 1977, making it one of the oldest hedge funds under
continuous management. The Elliott funds’ investors include pension
plans, sovereign wealth funds, endowments, foundations,
funds-of-funds, high net worth individuals and families, and
employees of the firm.
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version on businesswire.com: http://www.businesswire.com/news/home/20160608006023/en/
Media:Elliott Management CorporationStephen Spruiell,
212-478-2017sspruiell@elliottmgmt.com
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