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Company: Concentrix (CNXC)
Business: Concentrix provides technology-enabled customer experience (CX) solutions and operates customer service for 2,000 customers worldwide. They are the second largest outsourced CX company in the world, providing CX process optimization, technology innovation, front and back office automation, analytics and business transformation services. It also offers customer lifecycle management, customer experience/user experience strategy and design, and analytics and actionable insights.
Market value: $4.8 billion ($72.59 per share)
Activist: Impactive Capital
Percentage ownership: 5.11%
Average cost: $106.48
Comment from activists: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active ESG investor (AESG) that started with a $250 million investment from CalSTRS and now has nearly $3 billion. In just five years, the company has made a name for itself as an AESG investor. Wolfe and Asmar recognized that there was an opportunity to use tools, particularly in the social and environmental areas, to increase returns. Impactive focuses on positive systemic change to build more competitive and sustainable companies in the long term. Impactive will utilize all of the traditional operational, financial and strategic tools that activists use, but will also implement ESG changes that the Company believes are material to the Company and enhance the Company’s profitability and shareholder value. Impactive looks for high-quality companies, typically complex and mispriced, that can deliver an internal rate of return of at least 10% or 20% over a holding period of three to five years. The company also seeks to actively collaborate with management to find multiple paths to success.
What happens
Impactive Capital has reported a 5.11% stake in CNXC for investment purposes.
Behind the scenes
Concentrix, the second largest outsourced CX company in the world, is a high quality company. The customer retention rate is 96%, the average customer retention period is 15 years, switching costs are high, and the company is receiving tailwind from the switch to outsourcing. Once customers choose an outsourced provider, they are extremely loyal, largely due to the complexity of the implementation, which can take up to 12 months. This sustained and profitable growth has resulted in the company increasing its operating margins by nearly 600 basis points from 8.3% in 2016 to 14% in 2022. Additionally, Concentrix has very low cyclicality and shows resilience to various economic conditions, including Covid. The company’s economies of scale have created a competitive advantage and enabled it to take shares and achieve an IRR of more than 30%. Concentrix has grown both organically and through acquisitions over the past 15 years and has established a leading position in the industry. Just last month, the company acquired Webhelp, creating a diversified global CX leader. Together, Concentrix and Webhelp could deliver double-digit earnings and free cash flow growth.
However, Concentrix trades at the lowest multiple in its history – a free cash flow yield in the mid-teens and less than seven times earnings, while its peers trade at 18 times earnings. This dislocation is largely due to fears about generative AI, even though Concentrix is a stable, capital-light and growing company. But technological innovation is not a new factor in this industry. Since 1994, the CX industry has seen the creation of the Internet, text-based chatbots, emails and, five years ago, a first wave of chatbots based on artificial intelligence. The net effect of this innovation was that the major players increased their business fifty-fold. Impactive believes AI will be no different, that these AI risks are exaggerated, and that it has the potential to transform businesses to be productive and increase revenue. Customer service and human interaction will always be an important factor for a growing business, and AI has the potential to drive demand, as we have seen in both the health insurance and aviation industries.
Historically, Impactive has leveraged an activist toolbox focused on strategic initiatives, operational improvements, capital structure and ESG. The company sees significant strategic and capital allocation opportunities here: Concentrix is poised to generate 80% of its current market cap in capital deployable over the next three years and $2.5 billion in free cash (50% of current market cap ) to generate. Additionally, the company has $1.5 billion in debt capacity that it can invest in accretive acquisitions and share buybacks, which could result in significant earnings growth. Impactive is often a value-added shareholder and can greatly help the company analyze how to use that money, whether for stock buybacks, investing in organic growth, or consolidating mergers and acquisitions.
There are huge opportunities to improve employee retention in the ESG space. Turnover in the CX industry can range from 20% to 60% per year, and replacing an employee can cost around 20% to 30% of a worker’s annual salary. Impactive is currently working with the company to implement creative solutions, including building break rooms in Asia, offering free feminine hygiene products in the Caribbean, and introducing flexible schedules for working parents in the United States.
Impactive believes there is a significant return opportunity here with a base IRR of 24% to 45% and an upside case IRR of 78%, assuming growth normalizes over the next three years and post-Webhelp synergies – Merger can be used.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.