The Board’s Off-Cycle, $800,000 Stock Bonus to
Mr. Moriarty Comes as More than 60% of Shareholders are Demanding
Drastic Changes at Leaf Group
Shocked that Board Also Gave Mr. Moriarty a
$200,000 Cash Bonus in June, Just Weeks after Receiving a $7.1
Million PPP Loan and Cutting Pay for Company Employees
Leaf Group Continues to Trade at an 85%
Discount to Its Peer Group, as Peers Reach All-Time Highs
Mr. Moriarty Has Served as CEO for Six Full
Years and the Stock is Down 43% During His Tenure
Immediate Change is Required
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”). 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 full text of the letter follows and is available at
www.LiberateLeaf.Group.
August 12, 2020
Board of Directors Leaf Group Ltd. 1655 26th Street Santa
Monica, CA 90404
Dear Members of the Board:
Yesterday marked Sean Moriarty’s sixth anniversary of serving as
CEO of Leaf Group. The stock remains down 43% on his extended watch
while peers achieve all-time highs in the stock market. The effects
of the “Moriarty Discount” – a far-below market stock price and
multiple – are only increasing.
Given this performance, it is incomprehensible to us that the
Leaf Group Board approved a large grant of restricted stock units
(“RSUs”) to Mr. Moriarty in early August. Worse, that grant was
approved by the Board just hours after we – owners of more than 40%
of the stock – urged you to fire Mr. Moriarty given his dismal,
six-year track record of poor stewardship of this high potential
business. As you know, we are not alone in expressing concerns
about the Company. All told, holders of more than 60% of your stock
are calling for dramatic changes at Leaf Group.
Yet, in early August, you ignored this large group of Leaf Group
owners and the objective track record of Mr. Moriarty’s
underperformance by granting Mr. Moriarty special compensation
through a large grant of RSUs. The RSU grant (valued at $800,000)
gave Mr. Moriarty the Company’s entire second quarter profit (of
$803,000) even before the quarterly results were announced to the
public. Notably, the quarterly profit was the result of a one-time
gain from a divestiture, an across-the-board employee pay cut and
the first EBITDA positive quarter in Mr. Moriarty’s history as
CEO.
The compensation award was an affront to shareholders in other
ways, too:
- The grant was off cycle: Leaf Group has never granted stock or
bonuses to executives in July (or August), except for new-hire
grants.
- The grant did not include any performance vesting
requirements.
- Every member of the Compensation Committee that approved the
grant has a prior professional relationship with Mr. Moriarty from
his time at Ticketmaster.
Given the egregious nature of this compensation grant, it is not
surprising that the Company waited to disclose the Wednesday grant
publicly until a summer Friday at 4:47 pm ET, less than an hour
before the Securities and Exchange Commission filing deadline.
The Board must realize – as most shareholders do – that the Q2
earnings and subsequent results do not represent a sea change in
the Company’s performance, nor does it justify such largesse
towards Mr. Moriarty. The marketplace business did well – and will
continue to do well – because of an industry-wide and unexpected
secular shift to online shopping during the global pandemic. (We
are confident that Q3 will continue to benefit from the online
sales of face masks and home décor; however, none of that shift in
consumer demand can be properly attributed to Mr. Moriarty or his
strategy or foresight.)
The broader public market understands too that performance in Q2
(and presumably Q3) is not indicative of a sudden change in Mr.
Moriarty’s performance or an indication that the future will be
much different than the past six years of his tenure. Leaf Group’s
stock has underperformed its own DJ Internet Composite benchmark by
243% under Mr. Moriarty’s tenure. Nearly all the peer companies
trade at all-time highs, while Leaf Group wallows at a massive
discount to its high. Making matters worse, Leaf Group still trades at an 85% discount to the multiples of its
peer group even after today’s preannounced July results. The
gap in valuation multiples between Leaf Group and its peers has
widened after Q2. Valued in line with the peers, which we believe
is only possible once Mr. Moriarty is terminated, Leaf Group would
be worth many times more than today’s $5.50 price.
As a Board, you also know how fortuitous and unexpected Q2’s
performance was. After all, as recently as April 30, the Company
sought and accepted a federal Paycheck Protection Program (PPP)
loan of $7.1 million, one of the largest such loans received by any
company in the country, because the Board seemingly determined that
the business was in dire straits. (To receive that PPP money, the
Company had to certify that there was a serious need for federal
assistance.) Things were so dire that the Company cut employee pay
by 15%.
Shockingly, less than 60 days after receiving the PPP money and
cutting employee pay, the Board gave Mr. Moriarty a $200,000 cash
bonus. If Leaf Group had enough money to pay Mr. Moriarty a large
cash bonus in June, why had it reduced the salaries of the
Company’s workforce weeks prior to that?
Put simply, the Board is responsible for awarding cash and stock
bonuses for long-tenured, underperforming management (some paid for
with PPP money), while cutting pay for the rest of the Company’s
employees. These decisions make shareholders feel as if the Board
has no concern for employees other than Mr. Moriarty (or for
morale) and absolutely no interest in listening to or protecting
the interests of Leaf Group’s owners.
There is no alternative to immediate, drastic change at the top.
Leaf Group’s shareholders should not be asked to pay lofty special
bonuses to Mr. Moriarty while the Company continues to underperform
its potential or to wait for Mr. Moriarty to change his stripes in
year seven. We remind you that, as a public company CEO, Mr.
Moriarty has destroyed over a billion dollars of shareholder
capital.
Instead of rewarding Mr. Moriarty, he should be fired for his
six years of value destructive decision making. This Board should
be substantially refreshed with directors willing to prioritize the
views and interests of shareholders. And the Company should then
announce and conduct a bona fide strategic alternatives
process.
Shareholders will accept nothing less.
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.
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version on businesswire.com: https://www.businesswire.com/news/home/20200812005587/en/
Media Sloane & Company Dan Zacchei / Joe Germani
dzacchei@sloanepr.com / jgermani@sloanepr.com
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