September 25, 2023

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Firm: Rogers (ROG)

Enterprise: Rogers designs, develops, manufactures and sells engineered supplies and parts. It operates via Superior Electronics Options (AES), Elastomeric Materials Options (EMS) and Different segments. In November 2021, the corporate entered right into a definitive merger settlement to be acquired by DuPont de Nemours for $277.00 per share, which was authorised by shareholders on Jan. 25, 2022. Finally, the merger was terminated after the events didn’t obtain regulatory approval earlier than Nov. 1 from the State Administration for Market Regulation of China.

Inventory Market Worth: $2.8B ($150.99 per share)

Activist: Starboard Worth

What’s Occurring?

On Dec. 15, 2022, Starboard delivered a letter to the corporate nominating 4 administrators for election to the board on the 2023 Annual Assembly. Starboard recognized the next six candidates for the 4 seats however intends to finally embody solely one of many Starboard insiders within the slate and withdraw the opposite two: (i) Jacques Croisetière, board member at Arconic (ARNC) and former director at Versum Supplies (previously VSM); (ii) Peter A. Feld, managing member and head of analysis at Starboard Worth; (iii) Armand F. Lauzon, Jr., former president, CEO and as a director of C&D Applied sciences and former CEO and board member for 3 portfolio corporations of the Carlyle Group (CG); (iv) Gavin T. Molinelli, associate and co-portfolio supervisor of Starboard Worth; (v) Jeffrey C. Smith, managing member, CEO and CIO of Starboard Worth; and (vii) Susan C. Schnabel, co-founder and co-managing associate of aPriori Capital Companions.

Behind the Scenes

Rogers manufactures a wide range of merchandise, lots of that are small quantity custom-made merchandise which have a protracted life cycle. Traditionally, the corporate has been recognized for its innovation and plenty of of its merchandise had been invented by the corporate or have sturdy model recognition. This has given Rogers sturdy pricing energy and good gross margins. Due to this, the corporate has not needed to be as diligent operationally and their manufacturing and operational execution has not been optimum.

In November 2021, DuPont agreed to amass the corporate for $277 per share (19x earnings earlier than curiosity, taxes, depreciation and amortization on the time), a wholesome premium that was rationalized by the projection that Rogers would generate $270 million of EBITDA in 2022. Nonetheless, between signing and shutting, quarter after quarter Rogers’ working margins went down, finally from 17% pre-deal announcement to 11% by September 2022. By this level, DuPont would have been paying a 30x a number of, and their shareholders had been now not proud of the deal. The deal ended up not closing as a result of it didn’t get China regulatory approval by the drop-dead date, however it’s seemingly that because of the deteriorating operations of Rogers, DuPont was happier to pay the $162.5 million termination charge than to purchase the corporate for $5.2 billion.

The issue with Rogers just isn’t on the prime line: The corporate has sturdy natural development with 30% to 35% publicity to industries with secular tailwinds, akin to electrical autos and assisted driving. The corporate’s points are with its operations, and these points are self-inflicted. Like many corporations, it has provide chain points, however its manufacturing yields have been dangerous, and missteps have led to delays. This implies having to make use of air freight as a substitute of ocean, which is far more costly. When an organization has operational challenges, this subject will get exacerbated when administration loses focus and that’s precisely what occurred right here. After the deal was signed with DuPont, administration misplaced focus and began to coast to their change-of-control funds. Sadly, as a substitute it led to DuPont strolling from the deal, these funds by no means taking place and a precipitous drop within the inventory value. It additionally could have led to Bruce Hoechner departing as CEO on the finish of 2022 and being changed by Colin Gouveia, who was then senior vp and basic supervisor of Rogers’ EMS enterprise. 

A brand new CEO with a renewed focus is simply what this firm wants. Having a few Starboard administrators on the board to help administration in executing their plan, however holding them accountable if they can’t, would amplify the efficacy of the brand new CEO. There is no such thing as a cause why this could not finish amicably. Each side appear to share the identical views concerning margin enchancment, and there’s a new CEO who Starboard seemingly helps. Furthermore, Starboard made its director nominations proper earlier than the Dec. 17, 2022 expiration of the nomination window, indicating that the agency did it simply to protect its rights whereas speaking with the corporate. The truth that each side have saved the nominations confidential over the previous seven weeks is one other indication that they’re working amicably. Nonetheless, Starboard did nominate 4 administrators to the ten-person board. They really nominated six administrators for 4 spots, two of whom can be withdrawn if this goes to a proxy struggle, which is one thing skilled activists do to present them optimum flexibility.

Development just isn’t a problem right here and serving to corporations give attention to operational effectivity and margin enchancment is what Starboard does finest, ideally from a board stage. Having Starboard illustration on the board would assist administration keep targeted and get the help it wants. We’re not certain 4 new administrators are mandatory, however definitely two or three can be affordable, particularly if a kind of seats is for a Starboard insider.

Lastly, whereas Starboard’s major goal right here is operational, when an activist engages with an organization, it usually places that firm in pseudo-play getting the eye of strategic buyers and personal fairness. This phenomenon is magnified in a state of affairs the place an organization simply terminated an acquisition at a value that’s over 90% larger than the place the inventory is buying and selling now. There might positively be potential acquirers popping out of the woodwork right here. Whereas Starboard just isn’t advocating for any strategic transaction, the agency is an financial animal with fiduciary duties. If a proposal got here in on the proper value, Starboard would weigh that in opposition to shareholder worth as a standalone entity and do what it believes to be finest for shareholders. Nonetheless, a strategic transaction would take advantage of sense after the corporate fixes margins.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Rogers is owned within the fund.

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