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June 19, 2024

Breakingviews: Autodesk left a door ajar for its pushy investor

by Breakingviews.

Autodesk left its shaky foundation exposed. The $50 bln firm, which develops design software for engineers and architects, has drawn the ire of shareholder rabble-rouser Starboard Value over how and when it disclosed shifts in billing practices. Suspect financial goals and associated executive pay are a tempting activist target. The bigger problem is that this opens a path for Starboard to attack longer-running underperformance.

The company has an enviable niche serving industry-standard applications. Part of that lock-in was down to pushing up-front, multi-year contracts, but customers demanded discounts in exchange for this inflexibility. So, in 2022, management said it would switch to annual billing.

That didn’t quite work out: in the next fiscal year, Autodesk pursued long-term contracts to help meet its free cash flow goals. Along with revenue, that’s a key metric for determining executives’ performance-based equity payouts.

Snag is, investors weren’t told about the switch-up. Autodesk only disclosed an investigation into its practices in April, roughly a week after the window to nominate dissident members to its board had closed. Starboard is suing in Delaware to reopen that window, charging that shareholders were bamboozled.

The company says that there’s no issue, since its investigation didn’t lead to any financial restatements, and claims that the changes weren’t engineered to boost pay. Whatever the case, the actual issue at stake underneath all this is much simpler: Autodesk’s performance. While revenue has more than doubled over five years, profitability is weak. The company’s net margin was 16% last year, compared to 22% at rival Ansys. Add it all together, and Autodesk trades at 27 times estimated earnings over the next 12 months, according to LSEG, a near-20% discount to Ansys.

Starboard’s suggestions are standard fare: cut costs, refrain from silly acquisitions, and return capital to investors. A 6% rise in Autodesk’s shares suggests the market agrees. But what really offers a wedge for Starboard now is the investigation. Activists repeatedly home in on ersatz financial metrics, especially when tied to pay. Look at RB Global, where activist Luxor Capital stood opposite Starboard over a major acquisition, arguing that executives were unduly rewarded for chasing big-ticket deals. About half of activist campaigns surveyed by consultancy Semler Brossy involve gripes about incentive pay. Autodesk may have stood on unsound financial ground for a while, but it’s the specter of disputed rewards sitting atop it that could really encourage activists to dig their teeth in.

Context News

Starboard Value said in a letter dated June 17 that it had taken a stake of over $500 million in Autodesk and had filed a lawsuit in the Delaware Court of Chancery to compel the software company to delay its 2024 annual meeting and reopen nominations for its board of directors. The shareholder activist said Autodesk had withheld material information from shareholders ahead of the nomination deadline, and suggested several changes in how the company should be run. The board nomination window closed on March 23. The news follows Autodesk’s April 1 announcement that it would not file its annual report in time, and that the board of directors had begun an internal investigation regarding the company’s free cash flow and non-GAAP operating margin practices. The company subsequently said on May 31 that there would be no restatement of GAAP or non-GAAP financials.




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