Starboard lost its first legal battle with Autodesk. The battle has just begun | Wilnesh News

Business: Autodesk Engaged in three-dimensional (3D) design, engineering and entertainment technology solutions. Its products are primarily concentrated in the following categories: Architecture, Engineering and Construction, AutoCAD and AutoCAD LT, Manufacturing, and Media and Entertainment. Its products include AutoCAD Civil 3D, Building Connected, Autodesk Build, Revit, computer-aided manufacturing solutions, Fusion 360, ShotGrid and 3ds Max. Autodesk’s product development and manufacturing software provides comprehensive digital design, engineering, manufacturing and production solutions to manufacturers in the automotive, transportation, industrial machinery, consumer goods and building products industries. It also offers Wonder Studio, a cloud-based 3D animation and VFX solution.

exist June 17Afterwards, Starboard sent a letter to Autodesk shareholders announcing that it was filing a lawsuit to force the company to postpone its 2024 annual meeting originally scheduled for July 16 and reopen the director nomination window. This follows Autodesk’s delayed disclosure one of internal investigation Report violations that Starboard says may mislead shareholders and potentially deprive shareholders of their rights. Delaware Court of Chancery ruled against June 20, but the activist still believes Autodesk needs to strengthen its board of directors and improve growth and profitability through operating performance, capital allocation policy and investor communication.

But the vision of cooperation and constructiveness seems to be dashed April 1, when Autodesk publicly notified shareholders that its annual report would be delayed until the information was submitted to the audit committee, leading to an investigation into the company’s free cash flow and non-GAAP operating margin practices. finally, committee found Despite signaling to investors that it will shift enterprise customers to annual billing, Autodesk has recently pursued multi-year prepaid contracts at levels that even exceeded historical usage, helping the company achieve free cash in fiscal 2023 flow target.

To make matters worse, the company notified the SEC of the issues in early March but did not disclose the information to investors until after the nomination window closed, blocking potential activist director nominations this year. Still, Starboard said it privately offered to work with Autodesk to improve the board, but the company declined. Starboard is therefore asking Autodesk to reopen the nomination window so that shareholders can make a fully informed decision, taking into account the factual circumstances and the recent disclosures. The company rejected the offer. starboard File a lawsuit The Delaware Chancery Court asked Autodesk to postpone its 2024 annual meeting scheduled for July 16 and reopen the nomination window that closed on March 23.

While the findings are concerning in their own right, we think there are two things that could elevate this from a serious accounting issue to a more serious governance issue. First, while Autodesk uses free cash flow as a key operating metric, it also a factor on executive compensation. Second, how the board and management respond to the investigation may be a bigger question. The board appears to have decided that Deborah Clifford can no longer continue as treasurer. What happened next didn’t exactly inspire the board’s strong sense of oversight and accountability: Rather than fire her, Autodesk appointed Clifford as chief strategist. While the first issue reflects management and its lack of alignment with shareholders, the second issue directly relates to the board’s ability to monitor management and hold it accountable.

There is no doubt that these developments at Autodesk will require governance changes. The degree of change necessary does not depend on the actions of the company but on the level of participation. Starboard does not yet know whether this situation can be rectified with a few board seats or comprehensive board and management reforms, but that will become clearer as more facts about accountability emerge. From our perspective, the company’s response in punishing management, informing and working with shareholders does not bode well for a “small change” situation. Governance issues are critical here and must be addressed before Starboard can make any real economic changes that directly improve shareholder value.

Once this issue is resolved, the restructured board and management team can focus on improving operating margins and trading multiples to the extent necessary. A 1,000 basis point improvement in margins would be a significant increase in shareholder value on its own, but applying a larger multiple will have an exponential effect. Currently, Autodesk’s EV/CY2025E EBITDA multiple is 19.4 times, while some peers are higher than 30 times, with the peer average being 23.5 times. A good argument can be made that a market leader like Autodesk should trade at an above-average P/E, but as long as it’s in line with the industry average it makes a lot of sense for shareholders. This happens when shareholders have more confidence in corporate governance—when boards provide more transparency, oversight, and accountability—and when management meets targets rather than missing or lowering them.

Whether this happens will depend on several things. Starboard’s defeat in Delaware court puts this quick scenario off the table. While there is a proxy proposal this year that would allow 25% of shareholders to call a special meeting, even if the proposal is approved, companies will likely delay implementation and thus be of no real use until the next annual meeting. This may depend on how deeply involved the board wants to be and how persuasive Starboard and other shareholders are. Otherwise, you have to wait until 2025.

One last note: This isn’t the first time Autodesk has had contact with activists. Sachem Head ran an activist movement here between November 2015 and June 2017, eventually settling in three board seats and appointed a new CEO, Andrew Anagnost, who currently heads Autodesk. It is worth noting that one of the directors named under the Sachem Head agreement is Rick Hill, who has an interesting relationship with Starboard. He was Tessera’s chairman when Starboard launched a proxy fight there. At the time, he fought fiercely against the stalwart and was its most outspoken opponent. Starboard eventually replaced most of its board of directors Hill stays and eventually became the company’s biggest supporter. Since then, he has served as director nominee for both companies. Mayville Technology and Symantec. He no longer serves on the Autodesk board, but he could definitely serve as an informal advisor to Starboard or a cautionary tale for Autodesk.

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 activist 13D portfolios.