Cognizant Technology Solutions Corp (CTSH) sits at the forefront of modern business innovation, providing essential services like artificial intelligence tools, tech solutions, and consulting. They also focus on application development, systems integration, quality engineering, and assurance for industries ranging from health sciences to financial services, products and resources, as well as communications, media, and technology. The health sciences sector encompasses healthcare providers and payers, alongside life sciences enterprises. Meanwhile, their financial services arm caters to banks, capital markets, payment systems, and insurance companies. In products and resources, they collaborate with a variety of industries, including manufacturers, automakers, and retailers, to name a few. Their communications, media, and technology wing partners with sectors like global communications, media, entertainment, education, and information services.
As of now, Cognizant’s stock market value stands impressively at $39.13 billion, trading at $79.12 per share.
Meet Mantle Ridge LP, an investing powerhouse with approximately a 2.4% stake in Cognizant. While specifics regarding their purchase price remain unknown, Mantle Ridge, under Paul Hilal’s leadership, distinguishes itself with careful, calculated investments. Unlike other activists seeking several opportunities each year, Hilal and his team focus on a single promising venture every few years. Known for his collaborative approach, Hilal has a track record of reshaping company boards and management teams to optimize their asset portfolios. His influence stretches across investments previously made with Pershing Square, such as Air Products, Ceridian, and Canadian Pacific.
Currently, Mantle Ridge has poured over a billion dollars into Cognizant Technology Solutions, confident in the potential for growth and transformation.
Cognizant, a global giant in IT services, excels in digital transformation, consulting, and outsourcing but operates in a tough crowd with competitors like Accenture, Infosys, and Capgemini. The company, which began over 30 years ago under CEO Kumar Mahadeva, carved out a niche by offering competitive pricing and rapid growth, crucial for retaining top talent in an industry fraught with turnover risks. Under Mahadeva’s guidance, Cognizant soared, growing an incredible 35,000% from its IPO in 1998 to the conclusion of Francisco D’Souza’s leadership in 2019.
In 2019, when Brian Humphries, ex-Vodafone CEO, took the helm, many felt he was an outsider, out of touch with the company’s culture. His focus on cost-cutting and his aggressive style didn’t mesh well, leading to higher employee turnover, especially in roles crucial for growth. This turnover was contrary to the stability-driven strategy Mahadeva envisioned, which is critical for maintaining client relationships and ensuring consistent service. Humprhies’ time at the top saw Cognizant, once a leader in organic growth, falling behind its peers, with total shareholder returns dropping to -7% compared to significant gains by competitors like Accenture and Infosys.
Noticing undervalued potential, Mantle Ridge began acquiring shares in mid to late 2022, just before major internal changes at Cognizant. By January 2023, Cognizant had already started reshuffling its leadership with Ravi Kumar, formerly of Infosys, stepping in as CEO, and director Stephen Rohleder, an ex-Accenture exec, taking over as chairman. Although Mantle Ridge hasn’t commented publicly on these shifts, it’s rare for such substantial leadership moves to happen without external influence.
Under Kumar’s and Rohleder’s new direction, Cognizant is making a significant comeback. Since their leadership commenced, the company has delivered over 30% in total shareholder returns, surpassing both Infosys and Accenture. Reducing staff attrition and enticing back 13,000 former employees are clear signs of restored confidence. What was once an 900 basis points growth gap with peers has narrowed to just 30 basis points. Expectations are high that this upward trend will continue, with earnings margins also seeing a boost.
Despite this positive momentum, Cognizant still trades at a significant discount compared to its industry rivals. For instance, it’s valued at $119,000 per employee, while rivals command nearly double. Moreover, despite similar revenue, Infosys’ enterprise value nearly doubles Cognizant’s. The market seems hesitant to fully embrace the change, yet Cognizant seems poised for a potential reevaluation.
Typically, Mantle Ridge is known for its active involvement, often overhauling boards and leadership roles, but their current lack of direct intervention signals approval of Cognizant’s refreshed leadership. Hilal’s broad network suggests connections that may not be visible but are undoubtedly influential. As Mantle Ridge quietly maintains its position within Cognizant, it’s evident the board has been listening.
Cognizant’s investor day on March 25th is poised to be a platform where the company can spotlight these promising changes to Wall Street. With Mantle Ridge’s involvement, there’s increased interest and scrutiny, pushing the narrative that Cognizant is ready for a positive reassessment. Should management sustain its push towards excellence, there’s potential for a significant increase, perhaps upwards of 35% to 45% in the company’s valuation.
Ken Squire, the visionary behind 13D Monitor and the 13D Activist Fund, lends critical thought leadership in shareholder activism, observing that sometimes, the mere presence of an activist like Mantle Ridge signals imminent opportunity, even without aggressive actions.
