NEW CANAAN, Conn., April 22, 2014 /PRNewswire/ -- Stadium
Capital Management GP, LP and its affiliates (collectively referred
to as "Stadium"), which own approximately 2.3 million shares, or
about 9% of the common stock of Insperity, Inc. ("Insperity" or the
"Company") (NYSE: NSP), today announced that it had released a
letter to fellow Insperity shareholders. Stadium has been a
shareholder since 2008 and the Company's largest shareholder since
the middle of 2012. The letter explains Stadium's rationale for
voting against the Company's current slate of directors in the
upcoming election and why Stadium believes the board should
initiate a formal review of strategic alternatives.
In the letter, Stadium states that Insperity is trading at a
steep discount to its intrinsic value and to its Peer Group Index
as a result of the following:
- Poor operating results
- Substantial operating underperformance compared with
Insperity's own publicly shared long-term and shorter-term
operating goals
- Unacceptably poor operating performance compared to the
Company's Peer Group Index
- Excessive executive compensation and perquisites
- The Company's CEO and executive team have received over
$50 million in compensation over the
last five years in spite of serious underperformance versus their
own publicly communicated goals and guidance
- Insperity provides the CEO unlimited use of two enormous
private jets, paid for by shareholders to commute between his
multiple residences and the company's headquarters in Houston. This includes quasi-daily flights
between Houston, TX and the CEO's
primary residence in Dallas, TX.
The company also allows the CEO and other executives unlimited
personal use of these aircraft with only partial reimbursement to
the Company
- Excessive expense structure
- The Company uses its large aircraft for "business" travel more
than 750 hours annually. Stadium believes that these excessive
travel expenses alone may equate to almost $8 million annually, which is a major percentage
of the Company's operating profits
- Poor governance
- Stadium believes the Company's current board has failed in its
duties on a variety of issues related to operating results, expense
management, executive compensation and financing strategy
Stadium hopes other Insperity shareholders will examine the
details of its letter to shareholders and understand why Stadium
has elected to vote against the Company's current slate of
directors. The full text of the letter follows:
April 22, 2014
To our fellow Insperity shareholders:
Stadium Capital Management GP, LP and its affiliates
(collectively "Stadium" or "We") currently own approximately 2.3
million shares of common stock of Insperity, Inc. ("Insperity" or
the "Company"), or about 9% of the Company's outstanding common
stock. We have been a shareholder since 2008 and the
Company's largest shareholder since the middle of 2012. We
believe Insperity is substantially undervalued because of both poor
operating performance and severe corporate governance
failures. The purpose of this letter is to:
- Explain why Stadium intends to vote against the current slate
of directors; and
- Convey the substantial governance changes we believe are
required at Insperity to generally maximize shareholder value and
specifically allow for the facilitation of an independent strategic
alternatives process.
Stadium is a long-term oriented, research-driven investment
management firm that focuses on smaller capitalization public
companies. Over the past ten years, we have met with
Insperity management numerous times and, more importantly,
conducted intensive due diligence and research on the business.
This has included, among other things, almost two hundred Insperity
customer and competitor research calls. We learned from our
deep research that the Company provides valuable services to its
customers and that the long-term opportunity for organic customer
growth remains strong, despite the Company's lackluster growth and
cost mismanagement over the past several years. We have been
continuous, patient and supportive shareholders of Insperity since
2008. Since our strategy's inception over 17 years ago, we
have prided ourselves on our constructive, supportive relationships
with our portfolio companies. It is highly unusual for us to
express formal and serious frustration with the conduct and
performance of a portfolio company. As high as this bar is,
unfortunately in this case we feel the need to convey to fellow
shareholders our deep dissatisfaction with the situation at
Insperity. We believe the governance changes detailed below
would encourage increased investor interest and confidence, which
in turn could result in a materially higher trading multiple for
the Company that is also more consistent with its peers and the
overall market. We believe that this, combined with obvious
operating expense changes and a more rational capital structure,
should result in Insperity's being worth approximately $45-60/share in the public markets, which is a
significant premium to yesterday's close of $30.88/share.
We also believe a strategic alternatives process is warranted
now because over a multiyear period the Company's operating results
and share price have dramatically underperformed those of its
competitors, the Company's Peer Group Index1 and all
market indices, despite being in a growing and attractive
industry. We have specific knowledge of serious current and
past private equity interest in the Company. We also believe
the interest from a broad range of strategic players would be high
as well. Combining Insperity's large and loyal customer base with a
more efficient cost structure or with an emergent, cloud-based HR
technology company could represent a compelling value creation
scenario for Insperity's shareholders. The current board and
management have had ample time to generate superior shareholder
returns and have clearly failed to do so, as we will illustrate
below. Now is the time to see if the value of this business
can be optimized by someone else.
Over the last several weeks, we have engaged in a series of
discussions with the company's officers and directors, including
providing management with much of our analyses concerning the
issues in this letter. We asked the board to make several
governance and expense changes that we believe would benefit all
non-management shareholders. We also asked for three Stadium
representatives on Insperity's board as a way to align the board
properly with shareholders' interests. The board refused our
governance and expense control suggestions, but did eventually
offer to appoint one Stadium representative to the board, claiming
additional representation beyond one director would not benefit all
shareholders. Given the seriousness of the issues we see at the
Company, we strongly believe additional board seats are warranted
and required to effect real change, and consequently we ultimately
rejected the Company's counterproposal. In fact, the premise
that adding three Stadium directors would somehow be contrary to
the interests of all shareholders only confirms the board's
surprising lack of basic governance principles. As most
investors know, there is nothing about being a large shareholder
that creates misalignment with other shareholders; on the contrary,
a large shareholder by its very nature is much more aligned with
other shareholders (of any size) than are directors with minimal
holdings or insider manager/shareholders. This, however, is
an all too common misconception (or convenient excuse) used by
managers and directors who lack shareholder value creation
incentives and mindsets.
In the spirit of embarking on a constructive and private path
forward, we offered to compromise and accept two board seats,
rather than the requested three board seats. This compromise
was rejected by the Company as well. To be clear, Insperity
has two management representatives on the board, including the
Chairman's role, with significant and obvious potential for
misalignment of interest with shareholders. Furthermore, the
seven non-management directors collectively own approximately 0.7%
of Insperity. Even this meager quantity was likely "earned" as
compensation for director service, and does not represent a
deliberate capital investment in the Company. Somehow, for
reasons that defy governance logic, the board seems to view two
board seats by the company's largest shareholder and most-aligned
stakeholder in a different light than the seven directors whose
collective ownership is a tiny fraction of Stadium's. In this
context, the board's denial of Stadium's compromise request for two
board seats seems hypocritical, logically inconsistent and
self-serving.
Operating Underperformance
As the charts below show, Insperity has significantly
underperformed its own operating expectations and the performance
of its peers over both the short- and long-term. In fact,
Insperity has not grown EBITDA over the past five years at all, and
if Insperity achieves the midpoint of its FY 2014 guidance, this
will mark six years of essentially no growth in
EBITDA2. Insperity has also consistently failed in
its ability to deliver shareholder value.
In Chart 1, note that Insperity has not remotely achieved its
publicly communicated average paid worksite employees objective
that was issued in 20113. As we all know, average paid
worksite employees is a critical performance metric for the
Company. Chart 2 clearly demonstrates that the Company has
performed even more poorly on its EBITDA objective3.
Chart 3 illustrates similar underperformance versus the Company's
initial FY 2013 guidance4.
Chart 1: Underperformance vs. 5-year Plan – Average
Paid Worksite Employees
Chart 2: Underperformance vs. 5-year Plan –
EBITDA
Chart 3: Underperformance vs. 2013 Initial Guidance –
EBITDA
In addition to underperforming its own outlook, Insperity's
performance has also fallen short of its peers' over the last
couple of years. As Chart 4 shows below, Insperity's total EBITDA
declined 5.5% from FY 2011 to FY 2013, while its public
competitors'5 grew 12.4% and that of the Peer Group
Index5 grew 22.2% over a similar time period.
Additionally, Chart 5 illustrates that Insperity is the only one of
its Peer Group and publically-traded competitors that did not grow
EBITDA between FY 2011 and FY 2013.
Chart 4: Underperformance vs. Peers – EBITDA
Growth
Chart 5: Underperformance vs. Peers – EBITDA
Growth
Corporate Governance Failures
The board has tolerated the Company's poor operational
performance, overpaid the management team that delivered such
performance and has allowed, or perhaps even participated in, the
misuse of corporate resources to the detriment of the shareholders.
For example:
- Despite this period of stagnant EBITDA and dismal shareholder
value creation, Insperity's CEO has received nearly $18 million in total compensation over the last
six years, while Insperity's named executive officers ("NEOs") have
collectively received nearly $53
million over the same time period6. As we
highlighted earlier, Insperity's forecasted EBITDA for FY 2014 is
tracking approximately 50% below the rate articulated in the
five-year plan released by management in 2011 (also attached in
this filing), yet the total compensation for both the CEO and the
company's NEOs has remained consistently high. Short-term cash
bonuses have typically been too easy to achieve, Insperity's
long-term equity incentives lack any form of performance-based
vesting, and the board has shown no inclination to reduce
management's lavish perquisites.
- In defiance of Insperity's stated policy and despite these
generous levels of compensation, the board has continued to allow
the CEO to pledge 17% of his shares (1% of Insperity's shares
outstanding) as collateral on various loans7.
- We believe that the Company's investment in and usage of not
one, but two enormous aircraft (37-passenger EMB-135s, retrofitted
and configured for luxury corporate travel) is simply a gross and
conspicuous misuse of shareholder resources. Insperity's board, via
its compensation agreement with the CEO, allows for unlimited and
unreimbursed personal use of these two planes, at the sole expense
of shareholders, for the CEO to travel between his multiple
residences and company facilities. In an effort to gain some
understanding of the costs involved, we have reviewed several years
of publically available flight logs8 and believe this
arrangement, including quasi-daily and remarkably short commuting
between Dallas and Houston via such a large aircraft, is a
massive and inexcusable waste of shareholder money. In addition,
the management team has made significant personal use of these
aircraft. While the CEO and other senior management are
required to "reimburse" the Company for variable costs, these costs
do not cover the actual total costs of operation including capital
costs and maintenance expenses. In addition, the frequency of
travel to what appear to be domestic and international golf and
other vacation destinations is wholly inappropriate for a full-time
and well-paid CEO of a public company. Furthermore, flight logs for
these two aircraft suggest that above and beyond the excessive
expenses noted above, the Company uses these airliner-sized planes
for hundreds of hours of corporate travel. These data suggest that
Insperity appears to rack up more than 750 hours annually on these
aircraft. Our research suggests that if so, the annual cost to
shareholders – including variable, fixed and capital costs – is
likely close to $8 million, a
shockingly high proportion of overall Company
profitability9. If Insperity were to trade at
similar multiples to that of its competitors (11-14x EBITDA), the
cost to shareholders of this indulgence would equate to
approximately $90-$110MM in market
value, or roughly an increase of 12-15% in the total market value
of Insperity.
We believe these clear governance failures may be the product of
a board that lacks functional independence or lacks the prudent
business judgment to preside over a public company.
The Result: Market Value Underperformance
The growth in Insperity's shareholder value, as reflected in
market valuation, has significantly underperformed both its peers
and the market indexes. We strongly believe that this is the
result of the Company's disappointing and poor operating
underperformance combined with the market's perception that
Insperity's flawed governance structure will prevent the Company
from (a) achieving better results, (b) making the changes required
if results are not improved and (c) realizing value to shareholders
through a sale of the Company.
Chart 6 below illustrates the degree to which Insperity's market
valuation has underperformed versus all relevant benchmarks.
Insperity's public market multiple of Total Enterprise Value
("TEV") to EBITDA, currently at 7.4x, is significantly below the
average of its public industry competitors (12.5x), the average of
its Peer Group Index (20.6x) and well below the overall market, as
defined by the Russell 2000 Index (13.3x)10.
Chart 6: Lagging TEV / LTM EBITDA Multiples
Chart 7 compares Insperity's TEV / EBITDA multiple with recent
industry acquisition multiples, the recently public TriNet (a
direct competitor), as well as with the average of the median
M&A TEV / EBITDA sector multiples for North American companies
in Q1 201411:
Chart 7: TEV / EBITDA Multiples Comparison
We believe the net result of all these factors has produced an
unacceptable return to shareholders over the last five years. Chart
8 below compares Insperity's shareholder returns versus its peer
group and those of the Russell 2000 Total Return index, and speaks
for itself, in our view12.
Chart 8: Total Shareholder Returns
Changes Required to Maximize Shareholder Value
To address and remedy these issues, we are calling on
Insperity's board to do the following, immediately:
A. Enact Governance Changes
- Split the role of CEO and Chairman.
- De-classify the board.
- Appoint three new directors designated by Stadium, with one of
the three to become a truly independent Chairman.
- Immediately eliminate personal use of the Company's aircraft by
executives and spouses. Establish a board committee to evaluate the
Company's travel expenses and costs and benefits to the
shareholders of owning and operating two enormous jets.
- Change compensation agreements for management so that annual
cash bonuses are more difficult to achieve and stock awards are
subject to performance-based vesting, making them more aligned with
shareholder value creation.
- Deploy excess capital in the most advantageous manner for
shareholders. Insperity has significant excess cash that it
should immediately use to repurchase large amounts of stock. Not
doing so suggests that the board lacks confidence in the Company's
prospects and/or management's ability to generate shareholder
value.
B. Explore Strategic Alternatives
Insperity needs to engage new, independent financial advisors
and create a special committee of the board, with a Stadium
representative as Chair, to explore strategic alternatives for the
Company. There is clear evidence the market is willing to pay
high multiples for this type of business and that many industry
participants' businesses are growing, not stagnant. After such a
long period of underperformance and dismal shareholder returns,
shareholders should demand the board perform its duty to explore
whether the value of this business could be optimized by someone
else.
Conclusion
In our opinion, it is time for immediate change at
Insperity. The board needs to address stagnant operating
results as well as the corporate governance practices that have
permitted excessive compensation and the squandering of shareholder
resources. The board must also explore strategic alternatives
for the Company immediately. We also look forward to
Insperity's receiving any additional overtures from potential
private equity or strategic acquirers, as we think there is
significant potential value to be unlocked at Insperity that is
well in excess of today's current market valuation.
We fear that little may be accomplished without direct and
active shareholder involvement and a rejection of the status-quo at
Insperity. For this reason, we are voting against Insperity's
current board slate and urge our fellow shareholders to consider
what we have outlined above when they cast their votes in the
coming weeks.
Sincerely,
The Investment Committee of Stadium Capital Management GP,
LP
Alexander M. Seaver, Co-founder
and Managing Director
Bradley R. Kent, Co-founder and
Managing Director
Dominic P. DeMarco, Managing
Director and Co-Chief Investment Officer
John L. Welborn, Jr., Managing
Director and Co-Chief Investment Officer
Notes:
(1) The Peer Group Index is
defined using Insperity's most recent compensation peer group per
the Company's 2014 proxy filing and includes the following 15
companies: Automatic Data Processing, Inc., CBIZ, Inc., Cognizant
Technology Solutions Corporation, Concur Technologies, Inc.,
Convergys Corporation, Genpact Limited, Korn/Ferry International,
Paychex, Inc., Resources Connection, Inc., salesforce.com, Inc.,
Towers Watson & Company, The Ultimate Software Group,
Inc., Gartner, Inc., Intuit, Inc. and Web.com Group, Inc.
(2) EBITDA is defined as
Earnings before Interest and Taxes (EBIT), plus depreciation and
amortization, and adjusted to add back stock-based compensation
expense and other non-recurring expenses and/or extraordinary items
(most notably the Company's $12MM rebranding costs in 2011).
(3) FY 2014 guidance was
taken from Insperity's Q4 2013 earnings call held on 2/10/14. The
mid-point of the FY 2015 outlook was taken from Insperity's
investor day presentation on 3/31/11
(also attached in this filing). Assumptions for depreciation,
amortization, and stock-based compensation were made in order to
arrive at an estimated EBITDA for FY 2015. These are based on
historical trends.
(4) Initial FY 2013 guidance
was given on Insperity's Q4 2012 earnings call held on 2/8/13.
(5) Public competitors
include Automatic Data Processing, Paychex, and Barrett Business
Services. TriNet was not included in this group as it has completed
material acquisitions during the FY 2011-13 time period. In
addition, for the purposes of calculating EBITDA growth, the Peer
Group Index excludes CBIZ, Inc., Korn/Ferry International, Towers
Watson & Company, and Web.com Group, Inc., as these companies
completed material acquisitions during this time period.
(6) Compensation data sourced from
Insperity's annual proxy filings.
(7) Information sourced from
Insperity's most recent proxy filing on 3/31/14: "Prohibition on
Hedging and Pledging of Company Common Stock."
(8) Please reference Exhibit
1 and Exhibit 2 for detailed flights logs; data sourced from
FlightAware.
(9) Airplane usage costs
estimated per information obtained from Embraer for a similar-sized
aircraft, the Legacy 600. Total hours estimated at 750 (across both
planes) based on 2013 flight logs. Hourly variable costs estimated
at $3,600/hour, annual fixed
operating costs estimated at $660,000
per plane per year, and depreciation assumes $35MM in gross book
value with a 20 year straight-line useful life. Capital costs
assume a 10% cost of capital applied to an estimated $35MM book
value of plane assets, as noted in the 2013 10-K.
(10) The latest multiple data points are as of
4/17/14. The Total Enterprise Value for Insperity, the public
competitors, and the Peer Group Index includes adjustments for
long-term cash and marketable securities (considered additional
excess cash), if applicable, as well as deducting from cash the
amount that is held on behalf of clients (e.g. withholding taxes,
client prepayments, etc.), if applicable. The EBITDA calculation is
the same as noted above in Note 2. TriNet was not included within
the public competitors as it just recently went public and does not
have a long/significant public trading history. No companies were
excluded from the Peer Group Index for these calculations and all
companies were equally-weighted for averaging purposes. For the
Russell 2000 Index, multiples history was obtained directly from
Capital IQ. The Russell 2000 Index multiples are market-cap
weighted.
(11) Historical acquisition multiples data was
obtained from Capital IQ. The Q1 2014 market multiple represents
the average of the median transaction multiples with deal sizes
greater than $500MM and excludes the energy, financials, and
utilities sectors. The multiple for Ambrose was calculated from
data contained within TriNet's amended S-1 filing on 3/14/14.
TriNet's multiple was calculated as of 4/17/14 and is adjusted for the pro forma cash
and debt balances, as well as share count, provided on TriNet's
424B4 filing on 3/27/14.
(12) Total shareholder returns data was obtained
from Capital IQ. Total shareholder returns are adjusted to include
dividend payments and assume that dividends are reinvested into the
stock as of the pay-date. The Russell 2000 Total Return Index also
includes dividend reinvestment. The Peer Group Index is
equal-weighted, whereas the Russell 2000 Total Return Index is
market-cap weighted.
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Contact:
John Welborn
Stadium Capital Management
203-972-8235
jwelborn@stadiumcapital.com
SOURCE Stadium Capital Management GP, LP