April 16, 2012
/PRNewswire/ -- Cadian Capital Management, LLC (together with its affiliates, "Cadian Capital"), today announced that it has delivered a letter to the Board of Directors (the "Board") of Comverse Technology, Inc. (NASDAQ: CMVT) (the "Company") in which it expressed its concerns about the strategic direction of the Company and the continued decline in shareholder value. Cadian Capital beneficially owns 4,186,158 shares of common stock of the Company.
The full text of the letter is as follows:
CADIAN CAPITAL MANAGEMENT, LLC535 MADISON AVENUE, 36 th FLOOR NEW YORK, NY 10022
April 16, 2012
VIA HAND DELIVERY AND CERTIFIED MAIL
Board of Directorsc/o Corporate SecretaryComverse Technology, Inc.810 Seventh Avenue
New York, NY
Dear Members of the Board:
Cadian Capital Management, LLC, together with its affiliates (collectively, "
"), beneficially owns 4,186,158 shares of common stock of Comverse Technology, Inc. (the "
"). Cadian Capital has been a shareholder of the Company since February 2008. We, like many other shareholders, have significant concerns about the lack of progress the Company has made under the current Board of Directors (the "
") over the past several years. In the Fall of 2011, we conducted a successful "Vote No" campaign against several of the directors nominated for re-election at the 2011 annual meeting of shareholders (the "
2011 Annual Meeting
"). At the time of the 2011 Annual Meeting, we decided against seeking a more dramatic overhaul of the Board because we felt the Vote No campaign would send a message of accountability, which we hoped the Board would clearly hear. Unfortunately, our message has fallen on deaf ears.
Since the 2011 Annual Meeting, we believe the Board has continued to pursue several misguided and/or ill-executed strategies that have continued to prevent the Company from realizing value for shareholders. Earlier this month, the Company reported disappointing operating metrics for the Comverse Network Systems (CNS) business, which further underscores the effect of this Board's failure to attract and retain world-class senior management, and the disruptive effects of a quality asset held in strategic limbo in a market with substantial opportunities for revenue growth and margin expansion. While three recent acquisitions in the CNS space have been completed (or announced and are in the process of being completed) (Convergys Corporation, Intec Telecom Systems, and AsiaInfo Linkage, Inc.), the Board is currently pursuing what we believe is a sub-optimal strategy of 'spinning' CNS into a stand-alone, publicly-traded entity. We do not believe this Board, as currently constituted, is capable of effectively running CNS and/or unlocking shareholder value in the Company in the short or long run. We believe a majority of new directors should be nominated for the 2012 annual meeting of shareholders (the "
2012 Annual Meeting
The impact of the Board's failure can be seen very clearly in the Company's stock price. Since
January 1, 2007
, the Company's stock price has declined by nearly 70% and since its relisting on the NASDAQ Global Market in
, the Company's stock price has declined by more than 10%. By contrast, since
January 1, 2007
, the S&P 500 is down by only 4%, and since
, is up by more than 20%. Moreover, since its relisting on the NASDAQ Global Market in
, the stock price of the Company's majority-owned subsidiary, Verint Systems Inc., has increased by approximately 30% and is relatively close to its price of
January 1, 2007
, clearly demonstrating that the predominant cause of the Company's continued underperformance is its CNS business and the dissipation of its cash.
We believe the Company's massive underperformance can be attributed to a number of factors, including failed hiring decisions, failed and misguided strategic planning, poor execution of the CNS business, and a poorly managed re-statement process. These problems have occurred under this Board's supervision and have resulted in the destruction of over
of shareholder value.
Lack of Proper Senior Officer Hires
. One of the major issues raised as part of the Vote No campaign was the lack of a permanent and well-qualified CEO and CFO for the CNS business. For the past 14 months (in the case of the CEO) and 18 months (in the case of the CFO), each of these roles have been filled on (what was supposed to be) an interim basis by individuals we believe are not properly qualified
to hold such positions. This has clearly directly impacted the performance of the CNS business since that time (as evidenced, most recently, by the Company's very poor performance in Q4 2011, as well as its own admission in its Annual Report for fiscal 2011 that it continues to have material weaknesses in its internal controls over financial reporting), as well as this Board's ability to unlock shareholder value with respect to the CNS business. Five months after the 2011 Annual Meeting (and more than 14 months since the departure of the prior CEO and CFO), these positions remain inadequately filled. This situation must be solved immediately.
Failure to Realize Value in the CNS Business
. In the past 18 months, there have been three separate deals announced for companies comparable to the CNS business: Convergys Corporation just announced it is selling its Information Management business to NEC Corporation; CSG Systems International purchased Intec Telecom Systems; and AsiaInfo Linkage, Inc. is going private. In each case, the relevant CNS-comparable businesses were valued at between 1.0 – 1.4x trailing twelve month revenue. The CNS business would be a prime candidate for a similar sale (either in whole or in multiple parts), but for a number of actions we believe this Board has failed to complete, including hiring a permanent operating CEO and CFO (discussed above), having separate financials for the BSS and VAS business units, and correcting the organization's internal controls. The press has reported that the Board has retained Goldman Sachs and Rothschild to explore strategic alternatives for the CNS business, including multiple attempts to purportedly sell the CNS business. We believe these efforts have not yet been successful because of the Board's failure to execute these steps.
Misguided Spin-Off Plan
. The Board has announced it intends to try to spin-off the CNS business later this year. We think that is a fundamentally flawed strategy. We believe a spin-off would be very costly and likely require large amounts of the Company's cash. Furthermore, based on recent comparable acquisitions in this space, the CNS stand-alone entity would likely provide an unattractive subscale publicly-traded vehicle with weak financial processes. We believe the Board should instead focus on hiring an appropriate CEO (one with substantial operating and relevant industry experience) and CFO, and then working to improve the business's operations and internal controls, and preparing it for sale (including having complete separate financials for the BSS and VAS business units). As noted above, there is substantial interest in the market for an asset like CNS, and if the business unit's executive leadership (and subsequently operating issues) can be addressed, we believe a sale can be achieved in a much more efficient (and cash-generating, rather than cash-consuming) way.
Failure to Address the Holding Company Structure
. We believe the Company's current "holding company" structure has created a substantial drag on its stock price (as well as on the stock price of its most valuable assets, its majority interest in Verint Systems Inc.) for several years. Nevertheless, the Board has only recently indicated it intends to dissolve the structure, and only if/when it is able to complete a spin-off of the CNS business. We believe the Board should work to collapse its current holding company structure as soon as possible, and irrespective of whether/when a spin-off is completed.
Continued Poor Operating Performance of the CNS Business
. As the Company's most recent quarterly reporting confirms, the CNS business continues to disappoint. There was a surprising decline in both revenue and bookings, signaling underperformance relative to the Board's prior commitments to investors and relative to the rest of the industry.
All of the members of this Board have served for at least three years, and all but one Board member for five or more years. We believe this Board, as currently constituted, has categorically failed in its duties to create value for shareholders. Immediate change at the Board level is necessary to end the erosion of shareholder value and to realize the core value of the Company's assets. We believe a reconstituted Board with a majority of new, highly-qualified directors focused on reviewing all strategic options, with a skill set designed to allow for better execution on such options, is the best way to create value going forward. We have lost confidence in this Board's ability to make and execute on the wide range of important actions that need to be taken. Moreover, both Institutional Shareholder Services ("
") and Glass Lewis & Co. ("
"), two of the leading independent proxy voting advisory firms, agreed with Cadian Capital that change was needed on the Board at the 2011 Annual Meeting. ISS recommended a vote against two directors and Glass Lewis recommended a vote against five directors. Ultimately, two directors were forced to resign from the Board for failing to receive a majority of votes cast. We believe further change is warranted to restore shareholder value.
Since the Board currently has six members, we have nominated a slate of four new directors (a copy of their biographies was previously sent to you but is attached hereto for your convenience). We have not nominated a full slate of six new directors because we believe a newly constituted Board should retain some historical/institutional knowledge by having some of the current directors remain. In our view, the members of the Strategic Committee (
(Board member since
(Board member since
(Board Member since
)), as well as
(Board member since
, and whom, along with Mr. Oliver and Mr. Terrell, is a member of the Audit Committee), are most responsible for the failings of the Board and should not be nominated for re-election at the 2012 Annual Meeting.
As shown on the attached biographies, the four nominees we have proposed have the extensive range of relevant operating expertise and quality industry experience necessary to address the difficult challenges currently facing the Company, and are well equipped to both evaluate and execute the strategic steps necessary to improve shareholder value. These nominees should be much more effective at (i) seeking, attracting and hiring quality executive personnel (most importantly, a new CEO and CFO), (ii) working with such senior officers to help address the various issues causing CNS's continuing poor operating performance, and (iii) preparing for and executing an effective sales process with respect to the CNS business (either in whole or in parts).