Firm: Appian Corp. (APPN)
Enterprise: Appian gives enterprise course of administration (BPM) options. Its merchandise embrace BPM software program, case administration, cellular utility improvement and platform-as-a-service. The corporate was based by Matthew Calkins, Robert Kramer, Marc Wilson and Michael Beckley in 1999 and is headquartered in McLean, Va.
Inventory Market Worth: $1.86B ($25.21 per share)
Activist: Fivespan Companions
Possession: 7.91%
Common Value: $29.73
Activist Commentary: Fivespan Companions, LP is a San Francisco-based funding agency based in October 2023 by Dylan Haggart and Sarah Coyne. Previous to Fivespan, Haggart and Coyne had been companions at ValueAct Capital and 80% of the funding staff is from ValueAct. Fivespan, named after the distinctive five-stone arched bridge in Haggart’s hometown, views itself as a bridge between the market and firms. The agency prefers “behind the scenes,” collaborative and amicable activism, however it might resort to a proxy combat if there have been no different alternative. We anticipate that Fivespan will search for board seats in conditions the place it believes it might add actual worth, however we don’t anticipate the agency to pursue board illustration as usually as ValueAct does (i.e, in roughly 50% of core portfolio positions). Haggart has expertise as a public firm director. He served as a director of Seagate (2018-present) and Fiserv (2022-2024), the place he delivered stellar returns over his tenures of roughly 991.00% and 64.68%, respectively, versus 46.12% and 4.98% for the Russell 2000. Fivespan seems to be for top of the range, idiosyncratic companies with good, strategic belongings. The agency doesn’t advocate for promoting its portfolio firms as a major activist technique, nevertheless it likes firms that folks need to personal. Accordingly, a lot of its activist campaigns might finish with a sale of the corporate, offering two paths to shareholder worth. The fund is a drawdown construction that holds investments for at the least three to 5 years, goals to have six to eight investments at a time and averages $100 million to $300 million in every funding.
What’s taking place
On Jan. 27, Fivespan introduced that it’ll proceed assembly with administration concerning the corporate’s operations, technique and governance, together with whether or not it is smart for a Fivespan worker to hitch the corporate’s board.
Behind the scenes
Appian gives mission essential enterprise course of and administration software program options to a few of the largest, most advanced enterprises on the earth. Its buyer base consists primarily of legacy companies that function outdated backend know-how stacks, together with massive banks, telecom firms and even the Division of Protection. Appian’s software program is deeply embedded into these firms’ techniques, leading to extraordinarily excessive switching prices. Because of this, prospects rarely go away, with gross retention at roughly 99%. Furthermore, Appian and its friends have penetrated solely about 10% of what may very well be a $90 billion market. Because of this, the corporate advantages from constant mid-teens income progress, largely from new enterprise with present purchasers. Regardless of this compelling backdrop, Appian shares commerce at roughly 2-times gross sales and 3-times gross revenue – greater than a 50% low cost to equally located friends.
With Appian’s inventory down 89% over the previous 5 years, Fivespan Companions has entered the image submitting a 13D disclosing a 6.16% place in Appian and introduced that it’ll proceed to have conferences with administration concerning the corporate’s operations, technique and governance, together with whether or not it is smart for a Fivespan worker to hitch the corporate’s board. Any adjustments made or board illustration must come on the invitation of the present board as Appian is successfully a managed firm. Appian co-founder CEO, chairman, and president Matthew Calkins controls about 39% of the voting energy, two of the opposite three founders are on the nine-person board with many different administrators being former workers of Appian or having relationships with Calkins. However that’s OK. Going again to his ValueAct days, Dylan Haggart has had a whole lot of expertise and success working with managed firms like KKR and The New York Instances, the latter of which can be a present Fivespan portfolio place.
There are at the least three solvable points which have pushed Appian’s low cost. First is that the market has a basic false impression round Appian’s synthetic intelligence threat. As is the issue with many software program firms, Appian has been broadly categorized as an “automation” firm, main it to be lumped in with companies genuinely uncovered to AI disruption, equivalent to customer support or chatbot-driven automation. Appian’s automation, nonetheless, is completely completely different, as it’s centered on creating and implementing advanced backend processes. Nonetheless, this branding has pressured it to be painted with the identical brush, and in at the moment’s market, something related to automation is being offered off indiscriminately. Anybody who seems to be at Appian’s financials’ can acknowledge the fallacy of this bear case, as the corporate’s progress and retention metrics look nothing like these of firms with precise AI threat. The issue right here is that Appian has up to now failed to speak this to the market. The corporate’s 4 founders – Matthew Calkins, Michael Beckley, Robert Kramer, Marc Wilson – are tech guys, largely faculty buddies who began this firm out of a storage. These usually are not guys who need to discuss to the market, and the corporate’s lack of an investor relations skilled additional underscores that. Thus, speaking this narrative to the market and maybe even discovering somebody to fill this function for the corporate are each areas the place Fivespan might add instant worth.
Second is a scarcity of deal with margins. Traditionally, administration, like many different progress firms, has prioritized top-line progress with restricted consideration to the corporate’s profitability, leaving Appian’s free money circulation margins within the low single digits, whereas comparable companies like Pega generate margins north of 30%. With Fivespan now concerned, that is more likely to start to vary. Appian’s recurring and sticky income mannequin ought to enable them to pursue each income progress whereas increasing margins, by making certain that incremental progress generates incremental profitability. Whereas margins will not soar in a single day, they need to enhance steadily every quarter as prices proceed to develop extra slowly than income, one thing we now have noticed from bigger friends like Pega and ServiceNow. It is very important notice that this isn’t a state of affairs the place layoffs and cost-cutting will result in margin enchancment, simply being aware of incremental prices as income will increase ought to considerably profit the underside line.
Lastly is capital allocation. As margins develop, Appian ought to change into a money cow, making disciplined capital allocation more and more vital for a corporation that hasn’t had the strongest observe document of doing so. That is the place we see Haggart including probably the most worth. A few of the greatest activism happens when a very good activist will get on the board of a very good firm and administration continues to do what they do greatest – run the enterprise producing important free money circulation, and an activist like Haggart does what he does greatest – assist advise the board one of the simplest ways to spend the money circulation to maximise shareholder worth. That is one factor ValueAct is thought for and that Haggart did extraordinarily effectively at firms like Seagate. And that is an much more vital ability to have on Appian’s board, as the corporate is on the verge of coming into an at the least $500 million windfall from a company espionage lawsuit filed towards Pega. Appian sued Pega in 2020 and gained a $2.036 billion verdict in 2022. The Virginia Courtroom of Appeals overturned the decision in 2024 and remanded it again to the decrease court docket for a brand new trial. Nonetheless, Appian had partly insured the decision within the quantity of $500 million, that means that if it is in the end awarded lower than $500 million, the insurance coverage firm will make up the distinction. If it is awarded greater than $500 million, it’s theirs to maintain and the insurance coverage firm is off the hook. So, it’s only a matter of time earlier than Appian receives at the least $500 million, which is greater than 25% of the corporate’s total market cap.
Within the agency’s different three campaigns, Fivespan has demonstrated that it prefers “behind the scenes,” collaborative and amicable activism — and that is a very good factor because it does not have every other alternative right here. Nonetheless, whereas any strategic, operational, or governance adjustments are in the end within the firm’s discretion, we expect Appian and Fivespan are rowing in the identical path. Furthermore, we expect the corporate would profit significantly from the addition of a minority shareholder consultant on the board, like Haggart or one other Fivespan govt. One of many advantages of getting a hedge fund consultant on the board is that the board not solely will get the director’s recommendation and counsel, however the assets of your entire agency and its staff of analysts. That is significantly vital when there are essential capital allocation selections to be made. Finally, this shall be an activist-lite marketing campaign and Haggart is aware of that he can solely be efficient right here with the blessing and invitation of the founder. We anticipate he’ll proceed with that in thoughts.
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 investments.
