Rovi Corporation ROVI today announced that it has sent a letter to
all Rovi stockholders in connection with its 2015 Annual Meeting of
Stockholders, which will be held on May 13, 2015.
The letter highlights the series of strategic initiatives initiated by Rovi's
Board of Directors over the past three years, including reconstituting the
management team, completing a full strategic review of the business and
refocusing Rovi's mission to create lasting stockholder value – a stark
contrast to Engaged Capital's backward-looking criticisms and lack of any
alternative plan for the future. The Company also outlines in detail its
continued willingness to work constructively with Engaged Capital, including
having offered Engaged Capital the opportunity to actively participate in
Rovi's previously-announced Board augmentation process as well as Rovi's
good-faith efforts to reach a settlement, only to be repeatedly rebuffed or
refused by Engaged Capital.
The letter urges stockholders to vote for Rovi's seven highly-qualified
director nominees in order for Rovi to continue executing its strategic plan,
which has received broad support from the Company's stockholders.
The text of the letter follows:
April 21, 2015
Dear Fellow Stockholder,
YOUR VOTE IS CRITICAL
PLEASE VOTE THE BLUE PROXY CARD TODAY TO SUPPORT YOUR INVESTMENT IN ROVI
Your vote at Rovi's upcoming 2015 Annual Meeting is vitally important for your
Company and the value of your investment. Rovi's Board of Directors is fully
focused on what matters most to stockholders – driving sustainable growth to
create value now and in the future. By contrast, Engaged Capital seems to be
solely focused on the past, making backward-looking criticisms about events
and issues that Rovi's Board has already addressed and remedied.
Engaged Capital has launched an aggressive campaign to gain disproportionate
influence over Rovi's Board without any vision or plan for the future.
Instead, Engaged offers vague promises to come up with a plan. Rovi's
stockholders deserve more than a "plan to make a plan," particularly at this
important time for the Company.
Protect your investment. Don't let Engaged Capital dismantle a strategy that
is clearly working. Vote for the directors who are qualified and focused on
Rovi's future – not for a dissident with no vision who can't get over the
past.
ROVI'S STOCKHOLDER-FRIENDLY BOARD HAS OVERSEEN TREMENDOUS PROGRESS AND PUT
ROVI ON THE PATH FOR GROWTH
"We think shareholders should stay the course with Rovi's current
management…we see activist charges as dated, relating primarily to the
missteps of Rovi's prior management team, which its board saw fit to replace.
We believe the current management team has spent the past three years
correcting the mistakes of their predecessors, strengthened Rovi's IP position
for pending renewals, and executed on a product development strategy that
capitalizes on Rovi's market position and technology base."
Brean Capital, LLC, April 20, 2015
Engaged Capital consistently fails to acknowledge in its communications to
stockholders that Rovi is not the same company it was four years ago. Its
criticisms about M&A, product strategy, returns and "stewardship" frequently
relate to Rovi's 2010 acquisition of Sonic Solutions and the product strategy
of the prior management team. Engaged Capital is ignoring the fact that Rovi's
Board has been candid about those areas of underperformance and – recognizing
the need for change – took decisive action to reshape the Company and usher in
a new era at Rovi. It simply makes no sense to criticize a board for past
events that they have already addressed.
* New Management and Senior Leadership. Many of Engaged Capital's criticisms
are focused on strategic decisions made under previous management. These
criticisms are entirely outdated, as Rovi's executive team and senior
leadership have been entirely reconstituted since the Board appointed Tom
Carson as CEO in December 2011. Under the direction of the Board, Rovi has
added significant subject area expertise and talent throughout the senior
leadership ranks. For example, our new head of Corporate Strategy and
Development (2014) has already brought significant value to Rovi through
his leadership of the Fanhattan acquisition, while John Burke (2014) and
Omar Javaid (2014) have overseen the Company's strategic transition to
cloud-based product solutions, and John Hoctor (2013) and Kathy Weidman
(2014) are driving growth in our analytics and metadata businesses. While
Engaged Capital continues to raise complaints around the 2010 acquisition
of Sonic and old product disappointments led by prior management, this new
team of highly qualified leaders with a track record for successful
product deployments is driving our business forward.
* Strategic Review and Refocused Mission. Engaged Capital says it wants to
create a new Board committee aimed at developing a new strategic plan for
the Company – but they are a few years late on this idea. Rovi's Board of
Directors formed a special strategy subcommittee of the Board in the first
half of 2013. This strategy committee worked closely with new management
and outside consultancy firms to thoughtfully design a new and more
focused long-term strategic plan. This review included input from
customers and potential customers about their needs and their perceptions
of Rovi's products and services. After completing this thorough
business-by-business and product-by-product review, Rovi sold seven
non-core businesses, rationalized underperforming and non-core products,
and realigned the Company around Rovi's core discovery assets and growth
opportunities with the highest returns. Rovi is now fully focused on
powering entertainment discovery and monetization across multiple
platforms.
* Transformed Product Strategy. Engaged Capital repeatedly criticizes the
previous management team's product strategy, disregarding the fact that
Rovi's Board and current management have overseen a dramatic portfolio
transformation since the days of Sonic and TotalGuide. As a result of our
broad strategic review, Rovi made significant changes to our development
structure and transformed our engineering talent pool from one doing
almost exclusively heavy code on embedded devices to a team with strong
cloud-based and internet protocol delivery experience. We are approaching
products in an entirely new way – shifting resources and culture away from
the complicated and embedded code-heavy products like TotalGuide to
accessible cloud-based solutions our customers have asked for that can be
accepted and deployed on more flexible basis to fit particular customer
needs. Under new product leadership, we are bringing products to market
faster and more efficiently and seeing strong enthusiasm from Tier-1
customers across the product business.
Take it from our customers:
"Fan TV is really a paradigm shift from what's in the market today. It
provides new ways for our customers to discover the content we have…Fan TV's
user interface is pretty brilliant." – Mike Angus, SVP and GM, Video, Time
Warner Cable
"I think Rovi is making some smart investments in the field today…the fact
that Rovi has bought Veveo, which I think is one of the best platforms in this
market, says a lot about their investment strategy." – Vivek Khemka, SVP,
Product Management, DISH
"Rovi has been a very important partner of ours for many years. We've
incorporated Rovi's TV, Movie and Celebrity metadata and images across all our
platforms…" – Rick Rioboli, SVP, Comcast Metadata Products and Search Services
"Now we are going to be using Rovi's new metadata package called Rovi Music.
It should provide us with deeper coverage of digital-only content and
higher-quality images. We look forward to working with Rovi for a long time to
come." – Ian Gaeller, SVP, Business Development, Pandora
"There's no doubt that the TV business is moving in this direction…and we feel
like [Rovi's analytics tool] is the best tool out there." – David Campanelli,
SVP, Director of National Broadcast, Horizon Media
This type and level of positive feedback highlights the success Rovi is now
having in bringing innovative solutions to the market that solve pressing
customer issues. With major service providers such as Dish Networks, Charter
Communications and América Móvil who have license agreements for our
cloud-based products, it is clear that our next-generation product strategy is
working.
* Rebuilt Cost Structure. Engaged Capital's criticisms of Rovi's cost
structure fail to acknowledge that Rovi's investment in next-generation
products has been fueled in significant part by substantial cost-savings.
Over the past three years, Rovi has generated over $100 million in
cost-savings through such actions as shutting down products architected by
heavy code engineers such as TotalGuide (both for CE and Set-top boxes)
and Connected Platform, as well as increasing automation of our metadata
operations and leveraging off shore locations for engineering support. In
2014, Adjusted EBITDA margins were 43%, well above industry and proxy
peers.
* Re-tooled M&A Strategy. A significant amount of Engaged Capital's
criticisms are focused on the 2010 acquisition of Sonic – an acquisition
that closed over four years ago and was led by the previous management
team. Following the Sonic acquisition, Rovi's Board and new management
applied lessons learned and dramatically re-tooled the Company's approach
to M&A around core principles of discipline, accountability and success.
Today, any potential acquisition must be a strategic, technology and
cultural fit, and it must satisfy certain financial return requirements.
Since 2013, Rovi has invested a modest total of $118 million through four
key strategic acquisitions that are driving substantial opportunities
across the business. The Veveo acquisition enables Rovi to offer several
best of breed point solutions to customers, and, as a result, Rovi has
signed new product agreements with key service provider customers such as
Charter Communications, Dish Networks and Canal Digital Kabel. Fan TV has
enabled Rovi to close down its connected guide operations and replace the
team with a product now being deployed at Time-Warner Cable. Integral
Reach has opened up exciting opportunities for Rovi to monetize Return
Path Data, and our acquisition of a strategic patent portfolio has further
extended the relevance and lifespan of our IP portfolio.
* Strong Financial Oversight. Engaged Capital claims Rovi needs a new Board
committee to provide financial oversight, but Rovi has demonstrated strong
financial oversight over the past three years. For example, Rovi has
proactively restructured its debt and reinforced its balance sheet to
support the Company's business strategy while also overseeing over $500
million in share repurchases since 2012. Rovi has beneficially refinanced
over $1.36 billion since 2013, including repurchasing $297.4 million of
2040 convertible notes in February 2014 and issuing $345 million
convertible senior notes due in 2020. We also refinanced our bank debt in
2014 to extend maturities to 2019 and beyond – well past the upcoming
Tier-1 licensing renewal dates – to ensure maximum financial strength
during renewal negotiations.
* Enhanced Business Structure. Engaged Capital says Rovi should review its
business structure, but in fact, with the Board's approval and oversight,
current management reorganized Rovi into business groups to drive enhanced
ownership, accountability and alignment across the Company. Rovi also
unified our sales approach to drive more cross-selling between IP and
product, and enhanced internal management reporting to drive results
through improved measurement.
* Increased Transparency to Stockholders and Accountability of Management.
Engaged Capital's calls for Rovi to enhance transparency suggest they
haven't been following recent changes made to our financial disclosures
and guidance. In 2014, Rovi introduced IP licensing and product sales
segment reporting, reflecting our commitment to providing greater detail,
visibility and transparency with respect to our revenue. Rovi's enhanced
business structure has also increased transparency for stockholders by
enabling Rovi to track and report costs in greater detail than in the
past. Additionally, after a firm reset of expectations under new
management in 2012, Rovi has adopted a more conservative approach to
guidance, which involves more prudent assumptions on one-time catch-ups
and increased visibility to our revenues at the mid-point of FY estimates.
This approach has enhanced visibility for stockholders while maintaining
accountability for management, whose bonuses are now tied to the high end
of guidance. This past year we exceeded analyst estimates for 2014 revenue
and EPS by an average of almost 5%.
Rovi has already made the changes Engaged claims to want, and the Company's
strategy is working. As a result of decisive actions driven by this Board,
Rovi is growing our licensing business, accelerating product delivery to the
cloud and expanding our data and analytics businesses, all while sustaining
peer-leading profit margins and realizing steady annual improvement in Total
Stockholder Return (TSR). It is also notable that the vast majority of these
transformative efforts were taken before Engaged Capital started its campaign.
In criticizing Rovi's overall performance, Engaged Capital also ignores the
impact of Rovi's legacy analog (ACP) products between 2010 and 2014. We have
grown the core product and licensing businesses by over $100 million in this
four year period to offset these ACP headwinds, representing 6% CAGR for
Rovi's core. We have achieved these results during a period of acknowledged
transition and we expect to realize many of the benefits from our product
investments over a longer time frame.
Engaged Capital has not said what they would do differently. Engaged has not
offered any ideas for how to drive growth, either through licensing, product
delivery or otherwise, nor have they stated what costs they would be able to
remove from the business. All indications are that Engaged Capital would use
its position on the Board to dismantle Rovi's current strategy by drastically
cutting product investment. This betrays a lack of understanding of Rovi's
underlying business dynamics and should be concerning to all Rovi stockholders
– without investments in next-generation discovery and analytics products,
Rovi would be left only with a small and declining business of analog products
and set-top box guides, and a finite IP portfolio that would eventually lose
relevance without continued innovation from the product business groups to
drive new patent applications.
ROVI'S EXPERIENCED BOARD IS ACTIVELY ADDING NEW DIRECTORS WITH KEY EXPERTISE
Rovi has built a strong and diverse Board of Directors, including appointing
three new directors over the past six years. Average director tenure is 28%
below the S&P average for director tenure. At the same time, Rovi's directors
are actively working to further augment the Board with key strategic
expertise.
Our Board augmentation process began well before Engaged Capital made any
demands regarding new directors. In March 2014, as a result of an intense
period of restructuring, realignment and deep strategic review that took place
well before Engaged Capital's campaign, Rovi's Board decided to augment the
Board with key expertise in core strategic areas. The Board retained leading
professional search firm Howard Fischer Associates, to identify qualified new
Board candidates with high caliber experience and demonstrated success in (1)
advanced data and analytics, and (2) the service provider space.
After thoroughly reviewing a broad range of highly qualified candidates, the
search process yielded an exceptional candidate with the appropriate strategic
expertise in the advanced data and analytics space – Steven Lucas. Mr. Lucas
was appointed in March 2015 to bring highly valuable and relevant experience
in analytics and technology leadership. Importantly, the search process is
active and ongoing. We intend to continue to augment the Board with
high-caliber, value-added candidates with strategic expertise and deep
contacts in the service provider area.
The Board looked at Engaged Capital's Board nominees to see if any could fill
this requirement. In our opinion, none rose to the level of candidates the
Board is currently evaluating.
WE FIRMLY BELIEVE ROVI'S BOARD OF DIRECTORS IS BETTER QUALIFIED AND MORE
LIKELY TO DRIVE SUSTAINABLE STOCKHOLDER VALUE THAN THE DISSIDENT SLATE
Rovi's Board has a compelling mix and depth of industry leadership across the
spaces Rovi operates in – technology, media and finance – and the Board has
demonstrated its willingness and ability to navigate the Company through a
challenging period and create substantial stockholder value.
CHART: Rovi Board – Corporate Leadership, Functional Expertise and Industry
Experience
Engaged Capital's slate does not bring comparative strategic expertise, in our
view. We do not believe the qualifications of their nominees rise to the level
of value provided by current Rovi Board Chairman Andrew Ludwick, who has
overseen the Company's strategic transformation, current Rovi Board member Jim
O'Shaughnessy, who has decades of direct, hands-on experience negotiating
agreements as an IP licensing attorney and in IP dispute resolution (including
litigation), or current Rovi Board member Jim Meyer, whose experience and
relationships with top-level executives in the service provider and consumer
electronics industries have been invaluable to Rovi.
Our opinion of Engaged Capital's nominees has been validated by third parties
who have also questioned the quality of Engaged Capital's nominees:
"… Lockwood is a former Unwired Planet director. During … Lockwood's
stewardship of Unwired Planet, the company's stock went from about $2 in July
2013 to 56 cents today." The Patent Investor, April 3, 2015 (emphasis added)
"Engaged Capital's board nominees have certainly had some business successes,
but the most recent track records in the businesses closest to Rovi are far
from exceptional." Pacific Crest Securities, March 12, 2015
Indeed, the examples of value destruction by Engaged Capital's nominees are
numerous. Since a disruptive campaign led by Engaged Capital at Abercrombie
caused a majority change of the Board, including the addition of one of Glenn
Welling's nominees, Abercrombie has underperformed the S&P 500 by over 50%.
David Lockwood oversaw Unwired Planet (UPIP)'s stock price decline of nearly
20% during his tenure as director. Also during David Lockwood's tenure at
UPIP, the company closed a transaction that severely hindered its growth and
made it nearly impossible for it to monetize its patent portfolio.
We don't see why three new directors with little relevant experience in areas
that are core to Rovi's strategy would bring value to your Company's Board.
Rovi is a complex business facing a critical juncture. We strongly believe
that the election of Engaged Capital's slate could disrupt our current
momentum and would most certainly collectively diminish the talent and
experience of our Board. We believe Rovi stockholders will be better served by
continuation of the process we already have underway to augment the Board with
highly qualified candidates that bring value-added skills and experience to
oversee Rovi's growth.
ENGAGED CAPITAL REFUSES TO SETTLE THIS MATTER ON REASONABLE TERMS
Rovi's Board has a strong track record of soliciting and responding to
stockholder input, and has been and continues to be committed to resolving
matters with Engaged Capital in a constructive manner. Rovi's Board has
considered every reasonable opportunity to reach constructive resolution with
Engaged Capital, only to time and time again be rebuffed.
During the formal search process to augment the Board in 2014, the Company
learned of Engaged Capital's desire to add additional directors to Rovi's
Board and made several attempts to maintain active and constructive dialogue,
including permitting Engaged Capital to review and opine on Rovi's director
search criteria and lead candidates. Despite the numerous times Rovi tried to
include Engaged Capital in its process to add new members to its Board,
Engaged Capital refused to participate in a constructive manner.
Rovi offered several other good-faith gestures, including extending the
stockholder nomination deadline and agreeing to meet with nominees Engaged
Capital suggested. As our process continued, however, Engaged Capital refused
to cooperate and denied our requests to interview a nominee. Instead, Engaged
Capital abandoned almost two years of what Rovi believed to be friendly and
productive conversations, and announced its intent to nominate a dissident
majority slate.
Perhaps realizing the overreach inherent in its request to seat a new majority
of the Board with just 0.6% ownership, Engaged Capital appeared to change
tactic by proceeding with three nominees – a level of influence we believe is
still disproportionate to the dissident slate's overall position in the
Company. However, Engaged Capital has continued to seek control of key
strategic decisions through more covert means, proposing the creation and
control of a new Board committee that would possess unnecessarily broad
discretion and power, despite the lack of support or any single request for
such a committee from Rovi's other investors.
Still, in order to avoid a costly proxy fight, Rovi recently made a
reasonable, good-faith effort to reach a settlement with Engaged Capital. On
April 8, 2015, Rovi's Board proposed a resolution that would further augment
its Board with two new directors – one of Engaged Capital's nominees and
another director to be mutually agreed upon. In addition, as part of Rovi's
offer, a director endorsed by Engaged Capital would join the Board's existing
Strategy Committee and the Company would create a Finance Committee that would
be comprised of a majority of new directors and chaired by Engaged Capital's
nominee. One day later, Engaged Capital rejected Rovi's offer.
DON'T LET A DISSIDENT SLATE WITH NO PLAN FOR THE COMPANY INTERFERE WITH THE
LONG TERM VALUE OF YOUR INVESTMENT
Rovi is executing well against a transparent and widely-supported strategy.
What is Engaged Capital's alternative strategy? They haven't said, but it
appears they would plan to redo the hard strategic work Rovi's current Board
has already completed over the last three years, and do it during a period of
time crucial for execution, not second-guessing.
Over the past several years, Rovi's Board has strategically positioned the
Company to capture the attractive opportunities ahead, notably the Tier-1
licensing renewals and product opportunities in discovery, metadata and
analytics. We are winning with our customers, including recently announced
deals with Dish Networks and Charter Communications. With customer traction
across all lines of our business, and an opportunity to capitalize upon our
position as an early mover in the complex markets where we operate, we must
remain laser-focused on executing our strategy.
The Board and management team do not believe now is the time for unnecessary
and costly distractions, especially amidst such an important inflection point
in the Company's history. Rovi continues to be open to constructive
discussions with Engaged, but it is not willing to sacrifice the substantial
progress the Company has made thus far and put its future stockholder value at
risk.
We believe Rovi stockholders will be better served by directors who
thoughtfully architected this successful strategy than by nominees who haven't
even demonstrated a clear understanding of the business. Do not let one small
stockholder with no clear vision for the Company take over your Board at this
critical juncture.
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