Arconic

Activist Investor Assignment – ValueAct and Adobe System (NASDAQ: ADBE)

Peng Wang, 2017/02/22

• What is the fund’s history? Are they typically activist? Was their approach on this company always activist, or did they become activist over time?

ValueAct Capital, a San Francisco based fund, was founded in 2000 by Jeffrey Ubben, a former private equity executive, and portfolio manager at the Fidelity Value Fund. The combination of a focus on undervalued companies and a PE-style, hands-on collaborative approach are key components of ValueAct’s investment style. They tend to work in collaboration with boards and management to enact measures to increase the stock value. That is saying, that ValueAct is a typical activist and their approach to the company is always activist. For the past 14 years, ValueAct has gained a return of 1267% with a market return (S&P 500) of 161%.

One of ValueAct’s most successful recent deal is its investment on Adobe System Inc. (NASDAQ: ADBE) in December, 2011.

• Why did the fund believe there was value to be gained from taking an activist approach (put another way, what was their investment thesis)?

Investment Thesis on ADBE: Significantly undervalued potential in mobile devices and cloud computing.

The period between 2007 and 2010 was full of service discontinuations, hopeful acquisitions that floundered, layoffs and frustrations. ADBE engaged in a high-profile back-and-forth with Apple over the lack of support for Adobe Flash on the iPhone and iPad, prompting Apple founder Steve Jobs to publish his "Thoughts on Flash" in April 2010, which was widely seen as a public defeat for Adobe.

Ubben, the founder of ValueAct, believed that Adobe would be better off with a subscription-based cloud computing product focus, with particular emphasis on mobile adaptability. The board of Adobe, at that time, followed this advice. In 2012, Adobe introduced Creative Cloud, its subscription service for getting all of its tools. In 2013, on its Max conference, Adobe announced to put all of its resources into developing tools for Creative Cloud.

• How well does the investment fit the ‘good business’ framework of this class?

Market Position: ADBE is considered a major competitor in this industry. Other competitors include Apple, Microsoft, Oracle and IBM.

Market Growth: Steady industry growth. In recent 5 years, industry growth has been ranging from 0 – 5%.

Market Share Trends: ADBE is gaining share. Since 2011, ADBE’s revenue has grown from $4126 million to $5854 million in 2016. An average growth of 7%, outperforming market growth.

Business Cycle Risk: Average cyclical risk. I assume even when there is a major recession, people still need to use software to work. Although the sales should decrease, but the influence should not be significant. What’s more, ADBE’s business is diversified into global regions. This should somehow reduce the cyclical risk exposure.