Impactive takes a stake in Clarivate and sets the tone for activism in the post-SPAC world
Company: Clarivate (CLVT)
Business: Clarivate is a global information, analytics and workflow solutions company. It operates through three segments: (i) Academia and Government, which is about 49% of revenue and comprised of information and software services used to conduct, evaluate, and disseminate research; (ii) Intellectual Property, which is roughly 33% of revenue and includes services used by large corporations and law firms to establish, protect and manage their intellectual property portfolios; and (iii) Life Sciences and Health-care, which is about 18% of revenue and made up of information platforms used by pharmaceutical and biotechnology companies to gain approval from the U.S. Food and Drug Administration for new medications and bring them to market.
Stock Market Value: $5.16B ($7.65 per share)
Activist: Impactive Capital
Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active ESG (AESG) investor that launched with a $250 million investment from CalSTRS and now has over $2.5 billion. In just four years, they have made quite a name for themselves as AESG investors. Wolfe and Asmar realized that there was an opportunity to use tools, notably on the social and environmental side, to drive returns. Impactive focuses on positive systemic change to help build more competitive, sustainable businesses for the long run. Impactive will use all of the traditional operational, financial and strategic tools that activists use, but will also implement ESG change that it believes is material to the business and drives profitability of the company and shareholder value. Impactive looks for high quality businesses that are usually complex and mispriced, where it can underwrite a minimum of a high teens or low 20% internal rate of return over a three- to five-year holding period. The firm aims to have active engagement with management to set up multiple ways to win.
On April 27, Impactive announced that it took a stake in Clarivate.
Behind the Scenes
Clarivate went public via a special purpose acquisition company in 2019 and tripled the size of its business over three years through three transformative acquisitions. Their latest acquisitions were Patient Connect (December 2021), Bioinfogate (August 2021), and ProQuest (announced in May 2021). These acquisitions added high-quality and recurring revenue businesses that were adjacent to legacy IP lifecycle assets. However, they also added significant complexity, leverage, and execution challenges that drove the shares down roughly 70% from their peak and led Clarivate to trade at a significant discount to both peer and its own historical multiples. Clarivate currently trades at 11x enterprise value/earnings before interest, taxes, depreciation and amortization versus a peer average of 18x EBITDA and a historical average multiple of 21x EBITDA (as of April 4).
Clarivate has high-quality, recurring revenue that is mission critical to the day-to-day workflows of its customers and possesses 30% to 50% market share in its niches. It also enjoys resilient demand in economic downturns. The company’s products are critical inputs that facilitate drug discovery, support the development of key treatments — including the Covid vaccine — and help commercialize life-saving treatments in low-income countries. As with many SPAC companies, there were valuation, corporate governance and compensation incentive concerns at Clarivate. However, with the inevitable correction in the SPAC market, the stock has plummeted 75% from its highs, bringing it from overvalued to reasonably or undervalued. Moreover, the CEO and several board members have been replaced with a management team that would be amenable to working alongside an active stockholder like Impactive to create value for all shareholders.
This is a prime example of something we predicted years ago and is coming to fruition: SPAC mania is leading to a plethora of opportunities for activists. In their heyday, SPACs soared on hype with little regard to intrinsic value, even when the companies were run by founders who might not be the best candidates for a public company CEO. Now, many of these SPACs have come back to earth in valuation and are good companies at the right price, but they need a culture change so that they are managed by a CEO who has the stakeholders in mind. Clarivate seems to be on the way to that and will only get there quicker with the help of Impactive, who we expect to be an engaged shareholder here, as it is at all of its portfolio companies.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.