The Vultures at Elliott Management

Elliott Management’s dive into tech can be used as a leading indicator of which tech companies are great fixer-uppers.

Truth be told, Elliott Management, the vulture hedge fund, has a knack for finding those rusted cloud gems and polishing them shiny.

They don’t do this for free either, and making a killing on each of these turnaround stories usually has the same ruthless strategy.

Some of the prey were well-known within particular tech sector niches, like BMC, Novell and Informatica, but none were giants or household names.

Billionaire Paul Singer, notched sale after sale, reaping gains from the associated premiums on the acquisitions.

Most recently, his tech aspirations have increased with the pedigree of the company dwarfing in size he did before with stakes in eBay (EBAY), SAP, and AT&T (T).

This year, Elliott has already feasted on Twitter (TWTR) and SoftBank.

Part of the reason for slaying bigger dragons is because tech has gotten expensive with multiples expanding rapidly, and successfully leveraging usually works by going bigger and not smaller.

How does Elliott influence the change needed to raise the share prices?

First, getting his guys on the board to make decisions for the company.

He does this by getting his most trusted confidante and deal maker Jesse Cohn in the mix and he leads Elliott’s technology transactions.

He now sits on the boards of both eBay and Twitter.

Rather than scorching the earth for public change, he has worked in tandem with management at both companies.

Cohn is also supported by Elliott’s in-house Internet analysts, software analysts, operation analysts, consultants and stable of installed board members to help make decisions.

A decision they were at the forefront of was possibly firing Jack Dorsey at Twitter after identifying him as not maximizing profitability and revenue at Twitter.

Ultimately, Dorsey earned himself another quarter as CEO, but that’s how things work at Elliott, they run a tight ship.

Twitter said in a securities filing that a board committee formed this spring recommended that the current management structure remains in place for the time being.

The announcement gives Mr. Dorsey a reprieve after his performance was heavily criticized by Cohn and Elliott Management.

Twitter and Elliott reached an agreement in March in which the company agreed to appoint two board members and commit to $2 billion in share buybacks.

The agreement also included the formation of the new committee to study Twitter’s leadership, which effectively created a probation period for Mr. Dorsey to prove himself to the new investors.

So, does Elliott’s aggressive strategy work or fail?

The proof is in the pudding with Twitter shares up about 40% since bottoming out in March.

Twitter has expanded its userbase by about 23% since the fourth quarter of 2019.

So what now for Elliott?

Elliott is now one of the biggest investors in F5 Networks (FFIV), a Seattle company with a market value of about $8.8 billion.

They have spoken to the software company’s management about ways to appreciate the underlying shares which has not gone up in the past 365 days.

Shares have seriously underperformed to similar-sized cloud companies.

F5 Networks provides multi-cloud application services for the availability, security, performance, and availability of network applications, servers, and storage systems.

So far, they have announced plans to repurchase $1 billion worth of stock through fiscal 2022.

The buyback plan includes the accelerated repurchase of $500 million worth of stock in fiscal 2021.

The company said it targets double-digit adjusted earnings per share growth over the next two years and revenue growth of 6% to 7%, including software revenue growth CAGR of 35% to 40%.

These moves will help the company arrive at an inflection point in the transformation story where operating margins are poised to expand and revenue will accelerate, leading to sustainable double-digit growth

Elliott has also investigated some dubious decisions by F5’s management such as the company’s recent acquisitions of Shape Security Inc. and Nginx Software Inc., unhappy F5 overpaid without a clear integration strategy.

Elliott’ roadmap typically involves sizeable stakes in tech firms giving them the authority to throw their weight around behind the scenes.

Stock buybacks, acquiring company board seats, reducing expenses, acquisitions, wholesale management changes are part of their recipe for raising the stock price.

I have no reason to believe that Elliott will fail this time around after their string of tech successes and that leads me to recommend F5 Networks as a great buy the dip tech story.

The first stage of the turnaround is usually the most dramatic and noticeable with the follow-through to the flagging share price.

I wouldn’t be shocked if shares are up 25% from current prices in Q1 2021.