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Large investor Elliott challenges Commvault management

Investors cheered hedge fund Elliott Management’s disclosed stake in Commvault today, which will likely lead to a shakeup of the data management vendor’s management team and board.

Elliott, citing the need for fundamental changes at Commvault, published a letter to the company’s directors outlining proposed steps going forward. After crediting Commvault CEO Bob Hammer and COO Al Bunte for building the company from a startup to a market leader, the letter bluntly criticized Commvault’s performance over the past five years.

Elliott wants a complete review of Commvault’s management. Its letter called for four new directors to replace the four due for nomination this year. Those include Hammer, 75, who is chairman as well as CEO.

“Unfortunately, Commvault has not been a success story as a public-company investment,” stated the letter, signed by Elliott partner Jesse Cohn and portfolio manager Jason Genrich.

Elliott Management, often referred to as an activist investor, has imposed its will on companies much larger than Commvault. In October of 2014, Elliott – roughly a two percent shareholder in EMC – called for the storage giant to break up or explore a merger with another company. Almost a year to the day later, Dell said it would acquire EMC for more than $60 billion. BMC Software, Compuware and Riverbed were also sold after receiving letters from Elliot urging action.

Elliott isn’t urging a sale of Commvault but it wants changes made. Elliott Management holds 10.3% of Commvault stock, making it one of the vendor’s largest shareholders. Commvault’s stock price rose more than 10% today after disclosure of Elliott’s involvement, which can only put more pressure on leadership to take Elliot seriously.

Commvault released a statement saying its management team has already spoken with Elliott.

“Commvault conducts open communications with its stockholders, and the board of directors and management team values their input,” the statement said. “Commvault has had initial discussions with Elliott and we go into these discussions with an open mind, a goal of enhancing stockholder value, and optimistic for Commvault’s future.”

Cohn, at the time a portfolio manager, signed Elliott’s 2014 letter to EMC.

“We want to make clear that we have great respect for what Bob and Al have built over the last two decades,” Cohn and Genrich wrote in their letter to Commvault management. “The value creation opportunity present at Commvault today would not be possible without their leadership.”

However, Cohn and Genrich were highly critical of Commvault management over the past five years.

They said Elliott Management has expertise in the backup market and has studied Commvault for several years. They also said Elliott surveyed hundreds of IT decision makers and retained senior decision makers in enterprise software and broader technology markets as advisers.

The letter said the research “confirmed our view that Commvault’s product quality and feature set are unmatched in the industry.” However, “over the last five years, Commvault has been challenged by several of the most important technology trends in the market (including appliances, virtualization and hyper-converged). … While Commvault eventually released competitive products in response, these releases were generally too late.”

Commvault in late 2017 shipped its first integrated appliance, apparently in response to successful products from newcomers Cohesity and Rubrik. Commvault also lost share to Veeam Software, which concentrates on data protection for virtual machines.

Elliott criticized Commvault for an underperforming stock price, as well as declining operating margins, stalled revenue growth, poor profitability and operational inefficiency. It blamed Commvault’s low stock price on “a lack of credibility with investors.”

The letter said the board has “experienced an absence of accountability” and “would benefit from fresh perspectives, primarily in operational execution, software go-to-market experience and current (emphasis theirs) technology expertise.” It points out nine of Commvault’s 11 directors have been on the board for more than 10 years with six serving for more than 15 years. Elliott also criticized Commvault management for lack of diversity, because it has only one woman director, YY Lee, who was appointed earlier this year.

Elliott proposed two women for the board, Martha Bejar and Wendy Lane. Bejar has been CEO of three tech companies. Lane has served on the board of eight public companies, and is a former investment banker. The other proposed directors are Fidelis Cybersecurity CEO John McCormack and former Skillsoft CEO Chuck Moran.

“The skills and focus Commvault requires over the next five years must be profoundly different than those evidenced over the previous five,” Elliott’s letter said.

Elliott called for a comprehensive operational review of Commvault by a third-party consulting firm, concluding “there is substantial work to be done to transform Commvault.”

“We strongly believe that Elliott and Commvault can work together collaboratively to implement these recommendations and we are eager to sit down in person to discuss the path forward,” Elliott said at the end of the letter. “Please let us know when we can meet to discuss next steps or if you have any questions.”

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