Cog­nizant to Re­turn $3.4 b to In­vestors in Two Years

Co bows to share­holder de­mand, ri­val In­dian out­sourc­ing firms likely to fol­low suit

The Economic Times - - Companies: Pursuit Of Profit -

Jochelle Men­donca & Neha Alawadhi

Ben­galuru | New Delhi: In­for­ma­tion tech­nol­ogy ser­vices com­pany Cog­nizant will re­turn $3.4 bil­lion to share­hold­ers through a share buy­back pro­gramme and a div­i­dend, as the US-based com­pany ac­cedes to de­mands by one of its in­vestors — hedge fund El­liott Man­age­ment — in a move that could trig­ger calls for sim­i­lar ac­tion from In­dian out­sourc­ing firms.

Cog­nizant, which is aim­ing to de­liver stronger op­er­at­ing mar­gins, will also change the com­po­si­tion of its board. Three ex­ist­ing mem­bers of the board will not stand for re-elec­tion. To re­place them the com­pany will add three new in­de­pen­dent di­rec­tors, one of whom will be nom­i­nated by El­liott.

“We are pleased to be work­ing with El­liott and look for­ward to wel­com­ing new col­leagues to the board. In ad­di­tion, as part of to­day’s full-year earn­ings re­lease, we an­nounced a plan to ac­cel­er­ate our shift to dig­i­tal, ex­pand mar­gin tar­gets and launch a ro­bust new cap­i­tal re­turn pro­gramme,” Francisco D’Souza, Cog­nizant’s chief ex­ec­u­tive of­fi­cer, said in a state­ment.

In Novem­ber, Jesse Cohn a se­nior port­fo­lio man­ager at El­liott sent a let­ter to the IT com­pany’s board ask­ing it to shake up its board, raise its buy­back, ini­ti­ate a div­i­dend to boost its share price and take steps to boost its mar­gin. The hedge fund dis­closed a 4% stake in Cog­nizant.

“Cog­nizant must con­tinue to in­vest for growth and the dig­i­tal tran­si­tion, while fur­ther op­ti­mis­ing op­er­a­tions and re­turn­ing cap­i­tal to its share­hold­ers. We are large share­hold­ers of Cog­nizant be­cause we be­lieve the Com­pany has a strong po­si­tion in the in­dus­try and can de­liver com­pelling value to share­hold­ers,” Cohn

said in the state­ment.

ET has pre­vi­ously re­ported that El­liott’s let­ter to Cog­nizant has sparked a flurry of sim­i­lar re­quests be­ing sent to In­dian IT firms, which are also now fac­ing de­mands from both do­mes­tic and in­sti­tu­tional in­vestors for buy­backs of shares.

The out­sourc­ing in­dus­try has seen a steady dip in growth in re­cent times. The Na­tional As­so­ci­a­tion of Soft­ware and Ser­vices Com­pa­nies has cut the in­dus­try’s growth tar­get for fis­cal 2017 to 8-10% from 10-12% for the same year, as the in­dus­try also grap­ples with the grow­ing threat of pro­tec­tion­ism in its big­gest mar­ket in Amer­ica.

IT ser­vices firm Mindtree has al­ready sa- id it is con­sid­er­ing op­tions, other than div­i­dends to boost share­holder re­turns.

Cog­nizant’s board has also ap­proved a plan to re­turn $3.4 bil­lion to share­hold­ers over the next two years through a com­bi­na­tion of share re­pur­chases and div­i­dends.

As part of this plan, Cog­nizant said it would com­mence a $1.5 bil­lion ac­cel­er­ated share re­pur­chase pro­gram (ASR) in the first quar­ter of 2017, ini­ti­ate a reg­u­lar quar­terly cash div­i­dend of $0.15 per share com­menc­ing in the sec­ond quar­ter of 2017, and re­pur­chase shares of $1.2 bil­lion in the open mar­ket dur­ing 2017 and 2018. The com­pany said it would re­turn 75% of its free cash flow to share­hold­ers by 2019. “The man­age­ment has com­mit­ted to ex­pand mar­gins and re­turn cash to share­hold­ers (in line with ac­tivist El­liott's plan); we view the stock as good value,” David Kon­ing, an­a­lyst with US bro­ker­age RW Baird, said in a note.

The US-listed IT firm has also said it will tar­get a 22% non-GAAP op­er­at­ing mar­gin in 2019, up from its his­tor­i­cal 19-20% band. The non-GAAP op­er­at­ing mar­gin for the quar­ter end­ing De­cem­ber 31, 2016 was 18.7%.

Cog­nizant said it would fo­cus on high value ser­vices and pass on deals that would be less prof­itable. The com­pany will also boost util­i­sa­tion and au­to­ma­tion to ex­pand its mar­gins.

“Last year, we re-or­gan­ised how we did busi­ness into three ser­vice lines and that helped us sim­plify the com­pany. That is go­ing to help us take out some of the re­dun­dan­cies that may ex­ist,” Ra­jeev Me­hta, pres­i­dent of Cog­nizant, told ET.

The Tea­neck, New Jer­sey-head­quar­tered firm said its strat­egy of hir­ing more peo­ple on­shore and cur­rent in­dus­try pric­ing trends would mit­i­gate some of that mar­gin ex­pan­sion.

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