Autodesk invites activist shareholders onto board

CEO Carl Bass warned about short-sighted activists with “simplistic views.” Two weeks later they are on the board of directors.autodesk_600x400 logo

By Randall S. Newton

Autodesk has announced it is inviting representatives from so-called activist investor groups to join its board of directors. On the face of it, sounds like mild news. But there is more to the story.  

Autodesk (NASDAQ: ADSK) last reported quarterly results on February 25. Revenue was flat in the quarter, and for the year the company posted a net loss of $326 million. As we reported in the previous issue, Autodesk is in the middle of a revenue transition from perpetual licenses to subscriptions, and the rate of deferred revenue is rising nicely. But that doesn’t mean investors are all happy.

When a public company releases its quarterly results, there is a conference call with Wall Street analysts, with a question-and-answer period that takes up most of the hour. The usual questions about the usual issues came from the usual analysts, and then the Q&A was over. But CEO Carl Bass wasn’t finished.

In a closing statement that was not distributed in advance, Bass added some unexpected color to the results commentary. “I just wanted to say one thing … I am really just trying to avoid work for Dave [Gennarelli, director of investor relations] and Scott [Herren, chief financial officer] and I over the next couple of days… I get asked by all the investors in our building. And that’s just the question of what’s going on with our activist investors. And so, I just want to take that head on, I’m happy to talk about it privately with others, but it seems like a mistake not to address it to some degree. So, let me just give you my viewpoint on this.”

Carl Bass
Autodesk CEO Carl Bass

Bass went on to distinguish between long-term investors and activist investors. “I think too much credit is being given to them and not enough credit is being given to our long-term investors, who have asked for change in a constructive way.” Bass went on to describe activist investors as having a focus which is “extremely short-term and somewhat simplistic.” He used a sports analogy to explain: “It’s easy to sit on the outside and have lots of good ideas … if you turn on sports radio or political talk radio, you can hear thousands of people who know what the coach or general manager or owner should have done differently and ‘I’m worried about that. I watched that game last night, I had a million ideas of what the coach should do, but I didn’t actually have to do the job.’”

Bass continued by reminding the listening Wall Street analysts about Men’s Wearhouse, a company that was taken over by activists and has not done well since (it recently closed 250 stores). “My concern is people who like essentially want to turn Autodesk into Men’s Wearhouse. It you look, I don’t think any of the people who got involved in Men’s Wearhouse intentionally meant to do damage to the company. I don’t think they meant to screw it up, but I think they had some simplistic views and what troubles me is seeing those same views expressed about our business.”

Two weeks after Bass went off on activist investors, the Autodesk board welcomes them as new members. Autodesk chairman Crawford Beveridge announced “settlement agreements” on March 11 with two well-known activist investment firms: Sachem Head Capital Management LP and Eminence Capital, LP. As a result Autodesk has appointed Scott Ferguson, Rick Hill, and Jeff Clarke to its Board of Directors. Ferguson is managing partner of Sachem Head; Hill is chairman of Tessera Technologies; Clarke is CEO of Kodak. The three are assigned to subcommittees for Compensation and Human Resources (Ferguson), Corporate Governance (Hill), and Audit (Clarke).

Sachem Hill Managing Director Scott Ferguson
Sachem Hill Managing Director Scott Ferguson

Sachem Head first came to light as a significant investor November 2015, with a public statement that it expected to have a discussion with Autodesk management about various financial matters including costs. The New York Times describes Ferguson as “a protégé of veteran activist William A. Ackman;” he now has direct input into Autodesk’s compensation and human resources oversight.

These activist directors may have a bone to pick about how Autodesk spends its money, but at least in public they are on board with the move from selling licenses to offering software on subscription. In a statement released shortly after the announcement, Eminence CEO Ricky Sandler noted, “As committed long-term investors, we strongly support Autodesk’s business model transition and move to the cloud.”

What do we think?

Technology companies have a reputation on Wall Street for guiding performance toward the best interests of executive shareholders. No one is stating on the record if this is the case with these activists regarding Autodesk, but concern about costs is not a euphemism for buying fewer pencils. Expect some changes, albeit not immediately, about how the company manages executive compensation. There could be some changes coming to the top tier of management.