Maintain its rising companies or break up them

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Firm: Harmonic Inc. (HLIT)

Activist: Scopia Capital Administration

Share Possession:  9.61%

Common Value: $5.72

Activist Commentary: Scopia just isn’t traditionally an activist investor. Nevertheless, activist investor Jerome Lande (of Coppersmith Capital and previous to that, MMI Traders) folded his operations into Scopia for the aim of working an activist portfolio throughout the agency and giving activist recommendation and help on Scopia’s bigger portfolio, which is a conventional long-short fund.

What’s Occurring:

On April 9, 2021, Scopia and the corporate entered right into a Cooperation Settlement, pursuant to which so long as Scopia owns 5% of the corporate’s widespread inventory, they’ve the best to nominate two administrators to the board, considered one of whom is Jerome Lande, head of particular conditions for Scopia, and the opposite to be an unbiased director. This appointment could also be made at any time previous to the sooner of (x) 15 days previous to the deadline for the submission of stockholder nominations of administrators for the corporate’s 2022 Annual Assembly and (y) 75 days previous to the primary anniversary of the 2021 Annual Assembly. Scopia agreed to abide by customary voting and standstill provisions.  

Behind the Scenes:

Scopia has been a shareholder within the firm for the previous two years, watching and inspiring the corporate to develop bigger companies and higher sophistication throughout each of its segments. Whereas the corporate has begun to satisfy that prophecy and acquire market share, the method has been gradual and the corporate has been off on its projections. Nevertheless, over the previous few months there was new progress initiatives on the video facet, progress on the SaaS facet, some restoration from Covid and incremental progress within the Cable Entry phase. Because of this, these companies are nearer to important mass and at some extent the place they might be separated.

There was a substantial amount of consolidation within the Video enterprise. Ericsson divested its MediaKind enterprise to One Fairness, Cisco bought its Service Supplier Video Software program Options enterprise to Permira Funds and Amazon purchased an identical kind of enterprise. There might be many corporations on the market who is likely to be thinking about Harmonic’s Video enterprise, and this has additionally been an space that has seen PE curiosity. Harmonic might probably get north of $450 million for this enterprise and be left with its Cable Entry enterprise, which has been taking market share with excessive margins and is anticipated to proceed to develop at 30%+. The could be a possibility for the Cable Entry enterprise to proceed as a standalone enterprise or it might probably be taken out additionally.

So, the corporate is approaching an inflection level and Scopia needs to verify they’re taking these alternatives critically. Scopia is in a singular place to watch the corporate’s progress and might be watching to verify administration is exploring a separation of the companies whereas effectively working them. If Scopia must step in, they’ve a name possibility on two board seats. The truth that Scopia structured the settlement in such a means reveals that they’ve confidence within the board but additionally wish to have an insurance coverage coverage in case issues don’t progress like they hope. 

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 13D investments.