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P. Schoenfeld Asset Management put out a letter to NCR Corporation’s (NYSE: NCR) this week urging the company to provide NCR stockholders with a progress report on its strategic review. PSAM also noted its support the de-staggering of the Board of Directors and believes there are many potential paths to additional value creation for the Company to pursue.
Here’s the full letter:
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P. Schoenfeld Asset Management LP (“PSAM”) is an investment adviser registered with the U.S. Securities and Exchange Commission that has been providing investment adviser services to clients since 1997. PSAM’s clients collectively own approximately 2.4mm shares of NCR Corporation (“NCR” or the “Company”), in-the-money call options underlying another 0.4mm shares, and out-of-the-money call options underlying an additional 0.5mm shares.
Following our prior correspondence with the Company and in anticipation of the 2016 Annual Meeting of Stockholders of NCR, PSAM was pleased to learn that the Board will again include a proposal to amend the Company’s charter in order to eliminate the classification of NCR’s Board of Directors and to provide for the annual election of all directors. In light of the significant support this proposal garnered at the Company’s 2015 Annual Meeting, we believe that, so long as the Board is fully committed to expending the necessary time and resources to adequately communicate the importance of this issue to stockholders, the chances of success are high.
As a significant stockholder of the Company, we fully support the Board’s efforts to do away with its outdated and inappropriate staggered board structure, which can serve to entrench existing directors and management and hinder the ability of the Company’s stockholders to hold individuals accountable for the manner in which they discharge their duties. We feel the success of this effort is critical in light of the Company’s need for strategic focus and direction and we encourage all stockholders to support this effort.
In addition to eliminating its staggered board, we expect the Company, without further delay, to communicate to stockholders the results of its strategic review and its plans to fully maximize stockholder value. Stockholders have been anticipating this update for well over a year. In light of the delays in the Company’s communications regarding its strategic plan, we feel it is necessary at this time to reiterate our thoughts (which we have until now only communicated privately to the Board) regarding the Company’s strategic alternatives.
We see a number of potential paths to value creation. As we have previously written to the Board, we fully support management’s focus on migrating towards a software and services-driven company, and believe this process could be accelerated through a carve-out transaction of some or all of NCR’s hardware business. The Company should consider non-core asset sales (including NCR’s travel, government, consumables, or telecom businesses among others) or a split along industry group lines as other strategic alternatives.
We believe NCR has compiled a unique set of assets that are deeply undervalued by the markets. We believe that focusing on the Company’s ability to generate strong free cash flow is critical to closing this valuation gap. Enhanced transparency is vital to this end. Given the changing structure and operational strategies of NCR’s end markets, we do not advocate taking on significant levels of debt that could jeopardize the Company during times of economic volatility. Nonetheless, given NCR has reached its stated leverage target, we believe a long-term commitment to returning excess cash flow to stockholders would reinforce that the Company believes its progress is not fleeting. We would point to companies such as AutoZone, Home Depot, and DirecTV — three very different businesses — that all demonstrate that when a valuation gap exists, thoughtful capital allocation can close this gap and contribute to the consistency of the long-term earnings model. Further, share repurchases, regular dividends and special dividends would all enhance stockholder value and serve as clear indicators that the Company’s free cash flow is sustainable.
NCR currently trades at 9.5x the mid-point of its 2015 earnings estimates and 9x consensus 2016 earnings estimates, a significant discount to the 15-17x near-peers Diebold and Wincor traded at even prior to the announcement of their proposed transaction, and a particularly large discount to software-driven peers, such as Manhattan Associates and the acquisition multiple paid to Micros. We believe the market applies a significant discount to NCR’s shares due to ineffective communication regarding the Company’s strategic plan. The information void has led to speculative articles in the business press, which have suggested price ranges with private equity firms that we believe are completely inadequate for the Company. These unsubstantiated press reports have also further amplified investor concerns as to the success of its reinvention despite some early positive signs of growth.
The Board and management can take significant steps in realizing the vision of NCR becoming a fully-focused software and services company and we continue to hope they seize this opportunity. Eliminating the Company’s staggered Board will undoubtedly provide stockholders with the ability to help ensure progress towards this goal. We look forward to constructive dialogue on these issues.