IT services company Cognizant Technology Solutions Corp. ( (CTSH) ) shares jumped 10% early Monday after billionaire Paul Singer and his activist investment fund Elliott Management launched a campaign urging the company to take on more leverage to help fund research and M&A at the same time that it initiated a $2.5 billion share buyback program.
"Despite growing into a scale market leader with stable and significant cash flows, Cognizant has remained unwilling to establish a capital return program," said Elliott portfolio manager Jesse Cohn in a 16-page-letter.
The activist fund pointed out that Cognizant has $4 billion in net cash, including $1.1 billion in onshore cash following a recent repatriation and "virtually no debt." Cognizant, which has a $36 billion market capitalization, had $896 million in debt as of Sept. 30, according to its most recent quarterly report.
The activist fund said that Cognizant is trading at its lowest valuation since the financial crisis, which makes it a good candidate for buying back shares to boost its undervalued share price. It also is urging Cognizant to move substantially beyond its existing buyback approach, which only "repurchases shares to offset dilution." The fund is urging Cognizant to complete a $2.5 billion share repurchase program in the first half of fiscal year 2017, funded partly by cash on its books and new debt. In addition, Elliott wants Cognizant to set up a dividend program in part to help attract a new class of investors.
Cognizant trades at $57.69 a share, up about 9% on the Elliott campaign-- and Cohn suggests the IT services company can achieve a value of between $80 and $90 a share by the end of 2017