NEW YORK, Jan. 21, 2015 /PRNewswire/ -- Starboard Value LP
(together with its affiliates, "Starboard"), on January 20, 2015 disclosed a 13.2% ownership
stake in Insperity, Inc. (NYSE: NSP) ("Insperity" or the "Company")
making it the Company's largest shareholder. Starboard also
announced that it has delivered a letter to Paul J. Sarvadi, Insperity's Chairman and Chief
Executive Officer, and the Board of Directors of the Company (the
"Board"). Starboard looks forward to constructive dialogue
with Company management and the Board regarding the Company's
business and opportunities to create significant shareholder
value.
The full text of the letter follows:
January 20, 2015
Paul J. Sarvadi
Chairman and Chief Executive Officer
Insperity, Inc.
19001 Crescent Springs Drive
Kingwood, Texas 77339
cc: Board of Directors
Dear Paul,
Starboard Value LP, together with its affiliates ("Starboard"),
currently owns approximately 13.2% of the outstanding shares of
Insperity, Inc. ("Insperity" or the "Company"), making us the
Company's largest shareholder.
By way of background, Starboard is an investment management firm
that seeks to invest in undervalued and underperforming public
companies. Our approach to such investments is to actively
engage with management teams and boards of directors in a
constructive manner to identify and execute on opportunities to
unlock value for the benefit of all shareholders. Our principals
and investment team have extensive experience and a successful
track record of enhancing value at portfolio companies through a
combination of strategic refocusing, improved operational
execution, more efficient capital allocation, and stronger
management focus.
We have conducted an extensive amount of research on Insperity
and the industry in which it operates. We believe that
Insperity is deeply undervalued and that a number of opportunities
exist to create significant value for shareholders based on actions
within the control of management and the Board of Directors of the
Company (the "Board").
Insperity is one of the largest human resources ("HR")
outsourcing companies in the U.S. with over 130,000 Worksite
Employees ("WSEs")(1) and more than $2.3 billion in gross revenues. Insperity
is a Professional Employer Organization ("PEO"), whereby it
provides payroll services, benefits, and other HR-related services
to the employees of small businesses through co-employment
agreements with its customers. This is a stable, high-quality
business that operates in a growing market. Insperity
provides a critical service to its customers and, as a result,
Insperity's customer retention rate is approximately 99%. We
estimate that less than 10% of small- and medium-sized businesses
currently use a PEO to outsource HR services. This low
industry penetration rate results in ample growth opportunities,
and the current regulatory environment provides a further tailwind
for growth. Insperity has a strong value proposition that
drives customer growth: it is able to significantly reduce the cost
of insurance benefits for customers while providing a variety of
other HR services that enable small business owners to avoid
wasting time on administrative tasks related to the ever-changing
array of federal and state regulations. The Affordable Care
Act and other recent regulatory changes are positive growth drivers
for the PEO industry because they have increased complexity for
small businesses and raised the cost that employers must pay to
provide health insurance to their employees. The increased
complexity and higher costs should result in more small businesses
turning to PEOs for help.
Despite its favorable business characteristics and the
compelling growth prospects for its industry, Insperity currently
trades at a deep discount to its intrinsic value. Over the
past 1-, 3- and 5-year periods, Insperity has underperformed both
its peer group and the broader stock market.
Insperity
Historical Share Price Performance
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Share Price
Performance (1)
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1
Year
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3
Year
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5
Year
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Russell 2000
Index
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5%
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69%
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106%
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Proxy Peer Group
(2)
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5%
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87%
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155%
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Insperity
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2%
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58%
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77%
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Underperformance vs.
Russell 2000
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(3%)
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(12%)
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(28%)
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Underperformance
vs. Proxy Peer Group
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(2%)
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(29%)
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(77%)
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1. Performance as of 12/31/14, adjusted for
dividends
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2. Proxy Peer Group consists of companies used in
the Company's proxy to set executive
compensation
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We believe that this underperformance has been driven by a
combination of poor execution, lax cost management, and poor
capital allocation. In order to unlock this value, we believe that
management should take appropriate action, as outlined in more
detail below, to improve execution, reduce operating expenses,
improve capital allocation, improve corporate governance, and
explore all available alternatives to maximize shareholder
value. We estimate that pursuing this plan of action could
more than double Insperity's share price. Improvements in
cost structure and capital allocation should be easily achievable
over the next year and could result in a share price of
$53.84 – $64.80.(2) If Insperity is also
able to improve its growth profile and trade in-line with peers,
the Company could be worth far more over
time.(3)
Improve Execution
At Insperity's 2011 Investor Day,
management outlined a five-year plan which we believe should have
been readily accomplished over the time period that has
passed. Management estimated that Insperity could grow its
customer base to approximately 193,500 WSEs and grow EBITDA to over
$195 million by 2015.
Currently, Insperity has only 131,545 WSEs and LTM EBITDA is only
$68 million.(4) Both
of these figures are significantly lower than those outlined in the
five-year plan, which has resulted in shareholders being
consistently disappointed over the past four years. In order
for Insperity to meet its five-year objective, management would
have to grow WSEs by 47% and triple EBITDA over the next year.
Actual Results vs.
Historical Guidance
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2015 Guidance
5-Year Plan(1)
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LTM Results
as of 9/30/2014
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Difference
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Worksite
Employees
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193,500
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131,545
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-32%
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Net
Revenue(2)
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$655,965
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$392,424
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-40%
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EBITDA
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$195,434
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$68,365
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-65%
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(1) Mid-point of
2015 guidance range from NSP's 2011 Investor Day
presentation.
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(2) Total Revenue
minus Direct Costs (payroll taxes, benefits workers comp
costs).
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In addition, Insperity has underperformed its peers both in
terms of revenue growth and WSE growth. Over the past two
years, Insperity's average number of WSEs has grown at a 1.7%
annualized rate and its revenue has grown 4.6%. These growth rates
are significantly lower than those of Insperity's Public Peer Group
(as defined in the table below). Each member of this peer group has
grown its WSEs and revenue by an average of 16.4% and 24.2%,
respectively, during the relevant period. In light of this
historical fact pattern, we believe there is a meaningful
opportunity to improve the growth profile of the Company through a
combination of better management and better sales
execution.
Insperity Peer
Group Two-Year Compound Annual Growth (1)
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NSP
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TNET
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ADP
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PAYX
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Worksite
Employees
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1.7%
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25.1%
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12.6%
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11.5%
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Total
Revenue
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4.6%
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45.3%
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13.2%
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14.0%
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(1) Public Peer
Group includes NSP's publicly traded competitors TNET, PAYX and
ADP. Growth rates for ADP and PAYX are for their PEO business
only. Two-year growth calculated from most recent available
data.
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Reduce Operating Expenses
We believe there is a
substantial opportunity to improve Insperity's operating margins
through a combination of reducing excessive corporate overhead
expenses and more efficiently allocating advertising
expenses. Over the past year, Insperity spent more than
$83 million on general &
administrative expenses, which is approximately 21.2% of net
revenue.(5) We believe that this is an excessive
amount of expense for a company of Insperity's size, and its
G&A ratio far exceeds that of its peers. Included within
these expenses are two extremely large corporate jets that
Insperity currently owns (37-seat Embraer EMB-135s). We
struggle to understand what business purpose is served by owning
these aircraft. Virtually all of Insperity's sales offices
and service centers are located in major metropolitan areas that
are easily accessible by commercial flights. We estimate the
total variable costs and capital costs of maintaining these
aircraft to be approximately $10.5
million per year, or more than 15% of LTM EBITDA. At
Insperity's current 8.8x EV / EBITDA multiple, this implies that
management could improve the value of the Company by over
$92 million, or approximately
$3.65 per share, by simply
discontinuing the use of these jets and eliminating this seemingly
egregious expense. In addition, we estimate that, if sold,
the sale proceeds from these jets would exceed $35 million, or an additional $1.38 per share of value. In addition to
selling the jets and reducing executive compensation, we believe
there are many other opportunities to reduce corporate overhead
expenses.
We believe that Insperity also has an opportunity to
dramatically reduce advertising expenses without having a negative
impact on its sales. We believe that a large portion of the
current advertising budget is geared towards expensive television
advertising, golf tournaments, and other golf and sports-related
marketing. By shifting advertising spending away from these
outlets and toward more targeted online advertising, Insperity
could dramatically reduce its overall advertising budget while more
efficiently driving sales.
Insperity Cost
Structure - Peer Group Comparison (1)
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NSP
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TNET
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ADP
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Net Revenue ($ in
millions)
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$392
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$502
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$535
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EBITDA
Margins(2)
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17.4%
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35.0%
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44.0%
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Operating Expenses
per WSE(3)
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$210
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$111
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$73
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(1) Public comps
with available data.
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(2) EBITDA margin
calculated as a percentage of Net Revenue. Calculated from most
recent available data.
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(3) Average
monthly operating expenses divided by average Worksite Employees.
Calculated from most recent available data.
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Improve Capital Allocation
Given Insperity's stable
business characteristics and low capital-intensity, we believe that
Insperity's current capital structure is sub-optimal.
Insperity continues to maintain a large net cash balance, earning
little or no return for shareholders, while many other companies in
the industry deploy leverage in order to maintain a more rational
capital structure. For example, Insperity's closest public
competitor, TriNet (NYSE: TNET), is currently levered at
approximately 2.5x EBITDA.
We believe that Insperity should use its existing cash to
aggressively repurchase shares. Given the steep discount at
which Insperity currently trades, repurchasing shares will result
in a high return on capital. In addition, repurchasing stock
will send an important signal to shareholders that management is
confident that it can improve execution and meet its objectives
going forward. We believe that Insperity could repurchase
approximately 20% of its current shares outstanding without using
leverage.(6) With a modest amount of leverage,
Insperity could repurchase an even larger quantity of its
shares.
Improve Corporate Governance
Insperity's flawed
execution, bloated cost structure and poor capital allocation are
symptoms of a broader corporate governance problem that we believe
exists at the Company. Many of Insperity's corporate
governance policies appear to conflict with best practices.
In our view, a few examples of the Company's poor corporate
governance policies include:
- Excessive executive compensation and low hurdles for
performance-based compensation.
- Numerous related-party transactions between the Company and its
directors and officers.
- No independent Board chairman.
- A staggered Board, which disenfranchises shareholders and
entrenches the current Board and management team.
- A 'Poison Pill' plan that has been in place since 1998, which
discourages potential acquirers of the Company.
In addition to these points, the average tenure of a member of
Insperity's Board is over 17 years. We question the
independence of many of these directors and believe some directors
may have been on the Board too long to view certain strategic and
managerial decisions objectively or to fairly consider alternative
perspectives. We believe that Insperity's Board should be
improved with new independent directors that can bring a fresh
perspective to the boardroom and help the management team improve
execution and operational performance.
Explore Alternatives to Maximize Shareholder
Value
Insperity is a unique asset in an industry that has
seen significant consolidation in recent years. We believe
that there are numerous strategic and financial buyers that would
be interested in acquiring the Company which would result in a
robust sale process. We believe that financial buyers would
be attracted to Insperity's stable business characteristics and
cash flow generation potential. In addition, there appear to
be a handful of obvious strategic buyers for Insperity that would
benefit from the Company's established customer base and would be
able to realize substantial synergies. The Board must weigh
the potential upside from a standalone plan against the execution
risk associated with improving the growth profile and cost
structure of the business and also against all other strategic
alternatives. In conjunction with executing on the standalone
value creation opportunities we have outlined above, we believe the
company should also engage a reputable investment bank to explore a
sale of the company. We believe such a process would be highly
competitive and that the price achieved could provide for a better
risk-adjusted return versus a standalone plan, particularly when
factoring in the company's track record of poor
execution.
We have outlined a broad plan to improve the value of the
Company, and we look forward to discussing all of these points in
more detail with you. This is a critical period for Insperity
and we believe that now is the time to aggressively pursue the
initiatives outlined herein. As Insperity's largest
shareholder, we have a vested interest in seeing the Company take
advantage of all opportunities to create value for the benefit of
shareholders. We look forward to continuing our discussions
with you in the coming weeks.
Sincerely,
Jeffrey C. Smith
Managing Member
Starboard Value LP
(1) Work Site Employees are defined as employees that work
for NSP's customers, which NSP provides services to under a
co-employment agreement.
(2) Valuation range assumes NSP
is able to achieve approximately $135
– $145 million of EBITDA in 2016
through a combination of modest growth and cost cuts, trades at an
8-9x EV / EBITDA multiple and executes a $200 million share repurchase program at an
average cost of $41.50.
(3)
NSP's publicly traded peers trade in a range of approximately 12x –
14x EV / EBITDA.
(4) EBITDA defined as Earnings before
Interest, Taxes, Depreciation & Amortization. Excludes
impairment charges and other one-time items.
(5) Net
revenue is total revenue minus direct costs for payroll taxes,
benefits and workers comp.
(6) Assumes $200 million share repurchase at an average cost
of $41.50. Based on cash
balances disclosed in 10-Q filing for period ending
9/30/2014.
About Starboard Value LP
Starboard Value LP is a New
York-based investment adviser with a focused and fundamental
approach to investing in publicly traded U.S. companies. Starboard
invests in deeply undervalued companies and actively engages with
management teams and boards of directors to identify and execute on
opportunities to unlock value for the benefit of all
shareholders.
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SOURCE Starboard Value LP