These Activist Calls Don’t Compute at CTG-NASD

In my first piece in this series on activist catalysts, I detailed the activist investor involved in Electromed (ELMD-NASD).

What is happening at Electromed could be considered to be soft-activism. The activist firm is simply looking for Electromed to buy-back more shares. 

This next activist group is taking a more aggressive approach. They are targeting Computer Task Group (CTG) and have already approached the company with an informal take-over offer.

In this case I am not convinced of the activist claims. While there does appear to be un-realized value. the management team at CTG seems to be doing a fair job turning around the company.  Moreover, the activist take-over offer seems underwhelming. I question their motivation.

Instead the value gleaned from the activist has been by highlighting the opportunity. Had it not been for their involvement, I would not have stumbled upon the name.

Computer Task Group

There are two firms involved in CTG. They are working together in some capacity. One firm, however, appears to be spearheading the movement. 

That firm is Assurance Global Services LLC (AGS).

I cannot find much information on AGS. It is a money management firm, but whether it is a fund, a family office, or some other entity, isn’t entirely clear. It appears to have a single managing member, James Lindstrom.

AGS targeted CTG in the spring. They have accumulated their position at an average cost of a little over $4 per share.

According to their SEC disclosures, AGS would like to take Computer Task Group private. In an August 29th 13D filing, AGS detailed the history of events.

It began on May 21st when AGS sent a letter to the CTG board with a buyout offer – a “proposed purchase price of $5.50 to $6.00 per share in cash, a 23% to 35% premium to the closing price of the stock at the time”

The board rejected the offer. They said it undervalued the company and the board doubted AGS’s ability to fund and carry-through with their offer.

Shortly after that a second fund, Wax Asset Management (WAM) got involved. 

One June 22nd WAM agreed to support AGS in its effort to get management to communicate, though they did not specifically support the takeover offer.

WAM appears to be a (very) small fund, managing around $25 million. 

Together these two firms own 6.7% of Computer Task Group. Enough shares to have a say, but a long way from gaining control of the company.

These firms have continued to acquire their position for prices around $5 per share in September and October.

On July 10th AGS increased the take-over offer rather nominally, to $5.75 to $6.00 per share in cash.

On August 28th AGS sent a third letter. In it they explained their “willingness to increase the proposed purchase price if [CTG] provided information showing the risk-adjusted value of the Issuer to be greater than the currently proposed purchase price.”

Apart from concerns with AGS’s ability to consummate the transaction, the board at CTG believes more value can realized by carrying out the turnaround of the company.

They may be right. Let’s take a step back and look at the company.

CTG provides IT staffing and solutions. They serve a wide variety of industries including healthcare, financials, government and telecom. They have one major client, IBM, which accounts for 22% of revenue.

From 2013 to 2017, revenue declined a lot at CTG. 

It began in 2013 and 2014, when CTG saw a slight decline in revenue. 

This accelerated in both 2015 and 2016 when larger revenue declines came from their healthcare segment.  Sequestration imposed by the US Governments squeezed hospital budgets and in response they cut IT upgrades and staff. 

2017 saw more revenue declines due to cuts at IBM. The cuts resulted in a $22 million year over year decline in IBM revenue.

These 5 years of revenue declines left the company in a precarious position. But management has fought back and appears to be righting the ship.

The company has focused on

  1. rebuilding their healthcare revenue,
  2. expanding their Europe segment,
  3. converting Staffing business to stickier Solutions business and

D. focusing on a higher margin middle market opportunity.

2018 saw nearly 20% revenue growth over 2017.  So far in 2019 there has been another 11% year-over-year topline growth. 

Source: Company B Riley Investor Presentation

CTG’s non-GAAP earnings per share (non-GAAP EPS doesn’t include acquisition-related depreciation) increased from 20c to 26c year over year in the first 9 months of this year.

CTG is guiding to between 33c and 39c EPS for the year. The midpoint of revenue guidance implies 10% growth.

Source: Third Quarter Press Release

The story is not without its warts – organic growth appears to have slowed the last couple of quarters and management did lower the upper end of revenue guidance, though they attributed this to their choice not to renew some low margin Staffing business (they did raise EPS guidance at the same time).

While management is doing what it can, this remains a difficult business. 

IT Staffing made up 65% of revenue in the second quarter of this year. IT Solutions comprised the other 35%.

The revenue concentration on staffing makes CTG prone to a downturn in the economy. It is also a very competitive business.

The company realizes this and is focused on growing the Solutions business, which has higher margin. While IT Staffing is just what it sounds like – deploying people, Solutions reflects more depth of the engagement – providing team management, selling software applications for data management and application management, managing software maintenance and rollout – all which allow for more mark-up and better return.

The Solutions business has been slowly accounting for a higher share of the business. Solutions revenue grew 22% in the first 9 months, which solidly outdid growth at the corporate level.

IT Solutions is a very large market for CTG to penetrate.

Source: Company B Riley Presentation

But even so, overall revenue is still skewed to IT Staffing.

We’ll have to see if the activists at AGS and WAM are serious about their bid. Right now, their ownership of CTG is rather modest for an activist position.

In all honesty I think their bid is too low. It might have worked while the company was earlier in the restructuring, but after putting together quarter after quarter of increasing revenue and improved earnings investors will likely want more.

Given that the activist team has yet to raise their offer materially, even though they have tried to engage with the company since May, makes me wonder how serious they are.

This activist action doesn’t really make sense to me. Two very small activists looking at a very small company that is improving… management IS turning the ship around… I wonder what the REAL activist agenda is. In the opaque world of money management, we may never know.