New Mountain Vantage Advisers LLC’s Chad Fauser, an ex-partner at Trian Fund Management LP, on Monday, June 22, launched a campaign seeking to install three dissident directors onto the 10-person board of information technology company Virtusa Corp. (VRTU).
The public equity investment firm, which almost never launches public activist campaigns, raised concerns about Virtusa’s margins, earnings “volatility,” earnings-per-share growth and what it considered was a “flawed” management compensation structure, in a letter to management.
Virtusa hasn’t set a date for its annual meeting, though it typically takes place in September. The Southborough, Mass., company has a large IT services center in Siri Lanka, where the company was formed, but the vast majority of its workers are based in India.
New Mountain Vantage, which is the public equities arm of middle-market private equity firm New Mountain Capital LLC, began investing in Virtusa last fall and now owns about 11% of the company.
The investment firm had looked to work collaboratively with Virtusa by privately offering director candidates. However, the investment firm shifted to a public campaign after the company said it would nominate Abidali Neemuchwala, a former CEO of larger rival Wipro Ltd. (WIT), for election to the board. The move surprised the fund.
Neemuchwala, who was named CEO of Wipro in 2016, resigned from his role at the India-based IT services company on June 1. In a statement, Virtusa CEO Kris Canekeratne said Neemuchwala is “a highly respected leader and operator within the information technology services space.” The company also said it plans to find one more board candidate and it “welcomes” the opportunity to interview two of the fund’s three candidates.
New Mountain Vantage typically invests quietly and works privately, in a collaborative manner, with companies it targets, offering expertise on topics such as IT services. The fund initially offered Prasad Chintamaneni, a managing director at New Mountain Capital, as a director candidate, but was rejected.
Chintamaneni served as president of global industries and consulting at Cognizant Technology Solutions Corp. (CTSH), a much larger rival of Virtusa, between 2016 and 2019, and held various positions at the company over a nearly 20-year span, according to relationship mapping service BoardEx. The activists argued their candidates, including Chintamanei, would provide expertise and a significant degree of expertise, accountability to investors and independence to the company’s board.
Wipro and Cognizant have market capitalizations of $19 billion and $29 billion, respectively. Virtusa, meanwhile, had a market capitalization of around $940 million as of Monday.
A large percentage of Virtusa’s IT services focuses on banking and financial services, but the company has been seeking to diversify into healthcare. The dissident fund noted its two remaining candidates have a lot of experience in those sectors: Patricia Morrison, who had been chief information officer at large multinational healthcare services company Cardinal Health Inc. (CAH), and Michael Baresich, who previously served as CIO at Ally Financial Inc., CIT Group Inc. and Citigroup Asset Management.
One existing Vistusa director, however, has significant skin-in-the-game. In 2017, ex-Citigroup Inc. (C) CEO Vikram Pandit acquired 108,000 preferred shares, convertible into 3 million shares in Virtusa for $108 million, and he also received a seat on the board. While Pandit has a significant stake as a director, the company’s shares are at roughly the same price they were when the deal was struck.
The activist fund makes no mention of M&A. However, according to a person familiar with the situation, some bankers have recently pitched Virtusa as a company that could be ripe for a takeover.
The person suggested Virtusa could be a logical candidate for consolidation, either by a large strategic rival seeking to extract synergies or by a PE firm. In 2019, DXC Technology Co. (DXC), a rival IT services company, acquired Luxoft Holding Inc., a smaller IT services and software engineering company, in a $2 billion deal.
New Mountain Vantage rarely launches activist campaigns. Its last was in 2007 at National Fuel Gas Co. (NFG) when it sought to install a slate of directors to move the company faster along in drilling up the Marcellus Shale region. In 2008, the company agreed to give the hedge fund a board seat and split the chairman and CEO roles.
Fauser, who is leading the campaign for New Mountain Vantage, joined the firm in early 2018. He had previously served between 2005 and 2015 at Trian, as a partner and member of the investment team, where he worked with Nelson Peltz and was one of the founding senior analysts.
Between 2015 and 2018, Fauser was a partner and head of research at Venetus Partners LP, a firm he founded along with Nicholas Graziano. Graziano has since returned to work with Carl Icahn.
Virtusa hired proxy solicitor Bob Marese of MacKenzie Partners Inc. and Goodwin Procter LLP partner Joseph Johnson. Goodwin Procter has advised the company in the past.
Willkie Farr & Gallagher LLP’s Russell Leaf and Jared Fertman are legal counsel to New Mountain Vantage while Jordan Kovler of Harkins Kovler LLC is the investor’s proxy solicitor.