Notes that Companies Led by Mr. Moriarty Have
Destroyed More than a Billion Dollars of Shareholder Value and Leaf
Group Suffers from the “Moriarty Discount”
Believes Mr. Moriarty Deliberately Thwarted
Successful Outcome of Strategic Review Process
Urges Company to Run a New, Robust Strategic
Review Process to Maximize Shareholder Value
Investors owning over 40% of the issued and outstanding shares
of Leaf Group Ltd. ("Leaf Group" or the "Company") (NYSE: LEAF)
today issued a letter to the Company's Board of Directors (the
“Board”) detailing the case for terminating CEO Sean Moriarty and
launching a new, robust strategic review process.
The list of signatories to the letter includes Osmium Partners
LLC, PEAK6 Investments LLC, Boyle Capital Opportunity Fund, LP, Oak
Management Corp., Generation Capital Partners II LP, Generation
Partners II LLC, Spectrum Equity Investors V, L.P. and Spectrum V
Investment Managers’ Fund, L.P. (together, the "Investors") and is
comprised of several of the Company's largest and longest-standing
shareholders.
The Investors also launched a website where shareholders can
view all relevant materials and privately submit comments. The
website is accessible at www.LiberateLeaf.Group.
The full text of the letter follows:
July 27, 2020
Board of Directors Leaf Group Ltd. 1655 26th Street Santa
Monica, CA 90404
Dear Members of the Board:
We are writing to express our astonishment and dismay at your
continued support for Sean Moriarty as CEO of Leaf Group. With
Leaf’s stock underperforming the Nasdaq by a staggering -222%
during Mr. Moriarty’s tenure, and strong evidence of his disloyal
conduct and conflicts of interests, it is no wonder that nearly all
of the Company’s longest tenured and largest active owners have had
enough and are pounding on your door to make immediate changes.
Eight investment firms – representing over 50% of the Company’s
stock – have written publicly to you to express the urgent need for
change at Leaf. At least two other major shareholders, of which we
are aware, have also communicated this same message to you
privately, bringing the total opposition to the status quo to
nearly 60%. Even as this Board receives communication from us, and
numerous other shareholders on a near daily basis, your response
has been to effectively ignore your owners.
Consider that the median tenure of a public company CEO is five
years.1 Six years into his role as CEO, Mr. Moriarty holds a stark
record of poor financial and operational performance, shareholder
value destruction and an inability to develop or articulate an
attractive strategic plan.
These factors have combined to drain Mr. Moriarty’s credibility
with the stock market. We believe the market’s complete lack of
confidence in Mr. Moriarty costs shareholders at least $10 per
share, based on comparable public market valuations (the “Moriarty
Discount”).
Yet, you have “unanimously” expressed your support for Mr.
Moriarty. We recognize that several of you are longstanding
business associates of Mr. Moriarty. But your obstinance in the
face of overwhelming shareholder discontent is untenable,
unprecedented and unbecoming of good fiduciaries. By ignoring
nearly all forms of good faith outreach by a majority of
shareholders, you are flouting every basic tenet of sound corporate
governance that is critical to the healthy functioning of our
capital markets.
Mr. Moriarty’s Performance Has Been
Dismal, Harming Leaf Group’s Shareholders
Since Mr. Moriarty became the CEO of Leaf in August of 2014,
nearly every measure of financial performance has been
disappointing.
Before Mr. Moriarty, Leaf had generated positive EBITDA for 22
quarters in a row. This track record was broken as soon as Mr.
Moriarty was hired: from his first full quarter as CEO until last
quarter, Leaf has never since generated positive EBITDA in a
quarter, according to FactSet. In the twelve months prior to Mr.
Moriarty’s hiring, Leaf generated $23 million in positive EBITDA.
In the twelve months ended March 31 of this year, the Company had a
$16 million EBITDA loss.
The example of Society6 is also telling. In 2015 – shortly after
Mr. Moriarty became CEO of Leaf Group – both Society6 and publicly
traded Redbubble, the best comparable business to Society6, were
nearly tied in revenue. Since that time, Redbubble’s growth has far
outpaced Society6, and today, Redbubble’s market capitalization is
$450 million. By comparison, by the Company’s very own admission,
the best and only bid for Society6 in its recently completed
strategic review process was just $30.5 million.
Other financial metrics have similarly deteriorated:
- Revenue has declined from $172
million to $155 million (despite completing six acquisitions)
- Tangible book value has fallen from $3.24 per share at year-end
2014 to just $0.60 at year-end 2019
- Operating profit margins are 20% to 30% below industry
peers
- Shareholders have been diluted by 45%
Unsurprisingly, given this performance, the stock has fallen
from $9.76 the day before Mr. Moriarty joined to just $3.90.
Leaf Group has significantly underperformed its peers (as
selected by Institutional Shareholder Services) and the Nasdaq in
every relevant period:
Total Shareholder Returns
Through July 21, 2020
One Year
Three Years
Five Years
Mr. Moriarty’s Tenure
Leaf Group
-41.7%
-49.4%
-38.7%
-60.9%
Peers*
+35.6%
+17.8%
+40.1%
+35.6%
Nasdaq Composite
+32.5%
+72.6%
+116.9%
+161.1%
*Source: FactSet. Peer returns are a market-cap weighted index
of the list of peers selected by Institutional Shareholder Services
in its report on Leaf Group’s 2020 Annual Meeting.2
Apparently even Mr. Moriarty has no confidence in his own
performance. He has not bought a single share of Leaf Group stock
in more than five years. In fact, quite to the contrary, he has
been an aggressive seller of Leaf Group stock: he sold more than
$2.2 million worth of stock, leaving him with a stake worth just
$1.6 million.
In your most recent letter to shareholders, you claim that
business performance is improving, and that Mr. Moriarty therefore
deserves a reprieve. You neglect to mention that the global
pandemic has been a huge benefit to all internet-based businesses
and that any business strategy that depends on a once-in-a-century,
stay-at-home global pandemic is not a strategy at all.
But don’t just take our word for it; notably, the stock price
actually fell on July 7 after Mr. Moriarty pre-announced quarterly
results and trumpeted this newfound and likely short-lived success.
Subsequently, the stock has barely budged as Mr. Moriarty
desperately put out various press releases touting his
self-proclaimed “record performance.” If anything, Leaf is losing
market share in this environment. And, consistent with the Moriarty
Discount, Leaf stock continues to trade at an 80% discount to its
closest peers, as most of them reach all-time highs.
We are mindful that Mr. Moriarty, as a CEO, has never created
value for shareholders. Prior to Leaf, he was the CEO of
Ticketmaster. During his tenure there, shareholders lost more than
80% of the value of their investment, as business and financial
performance flailed. Shareholders have lost
more than one billion dollars investing in companies run by Mr.
Moriarty.
We have no reason to be hopeful or believe this pattern of large
losses will stop; neither should you. Why does this Board wish to
continue inflicting this billion-dollar loser upon
shareholders?
Mr. Moriarty Has Engaged in
Questionable Transactions to Shareholders’ Detriment
As you know, Mr. Moriarty is on the Board of Eventbrite (NYSE:
EB), a public company based in San Francisco. Years ago, Mr.
Moriarty pledged the stock he received as director compensation in
Eventbrite to a personal lender.
Eventbrite has a policy expressly prohibiting directors and
officers from pledging their stock. The SEC has a rule that
such pledges must be disclosed in IPO prospectuses. But Mr.
Moriarty failed to comply with either rule. Upon inspection, we
were not able to find a waiver granted by Eventbrite and the
pledge, in any event, was not disclosed in Eventbrite’s IPO
prospectus. We can only assume this omission – which we believe is
a violation of SEC disclosure rules – occurred because Mr. Moriarty
failed to tell Eventbrite and its lawyers, bankers and founders
that he had borrowed against his Eventbrite stock.
Mr. Moriarty’s actions serve as a case study in the perils of
stock pledging loans. Earlier this year, his lender seized and sold
Mr. Moriarty’s Eventbrite stock at a time when the stock price was
falling, likely surprising Eventbrite’s public shareholders. Mr.
Moriarty’s pledging of stock hurt the very investors he was
duty-bound to protect as a director of Eventbrite.
How can this Board be confident that Mr. Moriarty is making
appropriate disclosures about his conduct and financial
transactions to Leaf and its lawyers, bankers and directors?
Mr. Moriarty Apparently Interfered with
the Leaf Group Strategic Review Process
Faced with an activist campaign in 2019, the Board reluctantly
agreed to conduct a strategic review. Two of the signatories to
this letter were on the Board for most of that review. Those former
directors have not shared with our group or the broader shareholder
base their observations about the process, but they would welcome
that opportunity. Although we have asked you on several occasions
to permit them to speak, you have steadfastly refused.
Within the last several weeks, we have received multiple
unsolicited inbound calls from third-party participants in the
process, each of whom remains interested in acquiring some or all
of Leaf Group. We were dismayed to hear tales of disloyalty on the
part of Mr. Moriarty, including that he seemingly sought to thwart
legitimate buyers from entering the process and conducting
diligence, structuring deals, selecting assets and concluding their
negotiations. Given what we have heard from potential buyers, it is
now clear to us why you have refused to allow the former directors
to publicly offer their perspectives.
Given the inbound interest we have received, we are confident
that a successful outcome for the Company is within reach and
likely was not seriously pursued during the previous process. You
should have serious concerns about the outcome of this warped
process and the improper influence of a CEO who was intent on
ensuring the Company would not be sold. The process must be
conducted anew, with objectivity and without interference from Mr.
Moriarty.
Mr. Moriarty Has Benefitted from a
Friendly Board of Directors
Several of you are longstanding professional acquaintances of
Mr. Moriarty. We fear this has colored your perception of him and
your willingness to exert independent judgment.
Shockingly, both members of Leaf’s compensation committee (Ms.
Carmichael and Mr. Pleasants), for example, formerly worked
alongside Mr. Moriarty at Ticketmaster. We know of no other example
in all of corporate America of an entire compensation committee
that has longstanding professional ties to the CEO. As a practical
matter, the committee is not “independent” – it is instead
populated by Mr. Moriarty’s longstanding friends.
Mr. Moriarty has also made fast friends with others of you. Soon
after joining the Leaf Board last year, Mr. Baker, not
coincidentally, took a new position as CFO at Eventbrite, where Mr.
Moriarty serves as Chairman of the Compensation Committee. Mr.
Moriarty lavished a $10 million sign-on bonus on Mr. Baker. Mr.
Moriarty also serves on the Audit Committee of Eventbrite, which is
charged with overseeing the company’s accounting and performance of
its CFO, Mr. Baker. So, while Mr. Baker sits on the Leaf Board,
supposedly overseeing Mr. Moriarty, Mr. Moriarty has direct and
significant influence over Mr. Baker’s pay and performance
evaluation at Eventbrite. This is nothing short of incestuous.3
Thus, fully half of the “independent” directors of Leaf have
longstanding – or critically important and current – professional
ties to Mr. Moriarty. This is unacceptable.
Change is Needed Now
You have refused – despite the objective evidence of stark
business underperformance, the history of shareholder losses at
Leaf Group and Ticketmaster and the questionable conduct at Leaf
and Eventbrite – to remove Mr. Moriarty, even as he enters his
seventh year as CEO. This position stands in direct conflict with
the urging on the part of ten of the Leaf’s longest tenured and
largest active owners, representing nearly 60% of the Company’s
shares. We respectfully contend that your position – substituting
your own judgment for that of more than a majority of Leaf Group’s
shareholders – is as absurd as it is unprecedented.
Mr. Moriarty does not deserve more time. The public markets have
lost confidence in his leadership, which is clearly reflected in
the Moriarty Discount – a far-below market stock price and
multiple. We believe Leaf Group’s assets are extremely valuable in
the right hands and that a proper strategic review process –
untainted by the desires of management to remain in control – will
yield attractive results for all shareholders.
We urge you to remove Mr. Moriarty and to conduct a fair,
thorough and objective strategic alternatives process. We believe
all shareholders would benefit from such a decision.
Sincerely,
John H. Lewis on behalf Osmium Partners LLC
Rachel Saunders on behalf of PEAK6 Investments LLC
Erik Ritland on behalf of Boyle Capital Opportunity Fund, LP
Fredric W. Harman on behalf of Oak Management Corp.
John Hawkins on behalf of Generation Capital Partners II LP and
Generation Partners II LLC
Victor E. Parker, Jr. and Brian Regan on behalf of Spectrum
Equity Investors V, L.P. and Spectrum V Investment Managers’ Fund,
L.P.
About Osmium Partners
We seek to generate strong, risk-adjusted returns by investing
in undervalued, small capitalization companies across equity
markets. Our Osmium 8 research process is based on eight simple
factors involving factors such as balance sheet strength, aligned
interests, attractive reinvestment opportunities, a low valuation,
and reasonable growth prospects. As engaged owners, we actively
discuss corporate strategy and capital structure with management
teams and boards of directors. We prefer to conduct these
discussions in private, but we will publicly debate important items
with all shareholders when appropriate.
About PEAK6
PEAK6 uses technology to find a better way of doing things. The
company's first tech-based solution was developed in 1997 to
optimize options trading and, over the past two decades, the same
formula has been used across a range of industries, asset classes
and business stages to consistently deliver superior results.
Today, PEAK6 seeks transformational opportunities to provide
capital and strategic support to entrepreneurs and forward-thinking
businesses, helping to unlock potential and activate what is into
what ought to be. PEAK6's core brands include: PEAK6 Capital
Management, Apex Clearing, National Flood Services and Evil
Geniuses. Learn more at www.PEAK6.com or follow us on LinkedIn.
About Boyle Capital Opportunity Fund
Boyle Capital Opportunity Fund, LP is a value-oriented
investment partnership. We manage a focused portfolio of deeply
undervalued securities and actively engage with the company's
management and board of directors to unlock shareholder value over
the long-term.
About Oak Investment Partners
Oak Investment Partners was founded in 1978. Since that time,
the firm has invested $9 billion in over 525 companies around the
world, earning the trust of entrepreneurs with a senior team that
delivers steady guidance, deep domain expertise and a consistent
investment philosophy. We are involved in the formation of
companies, fund spinouts of operating divisions and technology
assets, and provide growth equity to mid- and late-stage private
businesses and to public companies through PIPE investments. These
companies are concentrated in the five major sectors that fuel the
most disruptive growth in our world today: Information Technology,
FinTech, Internet and Consumer, Healthcare Services, and Clean
Energy.
About Generation Partners
Founded in 1995, Generation Partners provides equity capital to
growth companies through buyout and growth equity investments.
About Spectrum Equity
Spectrum Equity is a leading growth equity firm providing
capital and strategic support to innovative companies in the
information economy. For over 25 years, the firm has partnered with
proven entrepreneurs and management teams to build long-term value
in market-leading internet, software and information services
companies. Representative investments include Ancestry, Bats Global
Markets, Definitive Healthcare, GoodRx, Grubhub, Lynda.com, Origami
Risk, SurveyMonkey and Verafin. For more information, including a
complete list of portfolio investments, visit
www.spectrumequity.com.
______________________ 1 Source: Equilar,
https://www.equilar.com/blogs/351-ceo-tenure-drops-to-five-years.html?mod=article_inline
2 ISS peers include: AutoWeb Inc., Care.com, Inc., Channeladvisor
Corporation, DHI Group, Inc., Digital Turbine, Inc., Fluent, Inc.,
Harte-Hanks, Inc., Liquidity Services, Inc., Magnite, Inc.,
Marchex, Inc., Meet Group Inc., Model N, Inc., PetMed Express,
Inc., RealNetworks, Inc., SPAR Group, Inc., Synacor, Inc.,
TechTarget, Inc., TeleNav, Inc., Travelzoo, TrueCar, Inc., U.S.
Auto Parts Network, Inc. 3 The Leaf Group Board essentially
admitted as much when it removed Mr. Baker from the Leaf Group
Audit Committee after we previously complained about his lack of
independence.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200727005384/en/
Sloane & Company Dan Zacchei / Joe Germani
dzacchei@sloanepr.com / jgermani@sloanepr.com
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