Motley Fool Hidden Gems Investing - Activists at Autodesk’s Door

Episode Date: June 17, 2024

Starboard Value would like to see some changes at Autodesk and isn’t shy about it. And Jensen Huang’s commencement address at Caltech has some timeless life and investing advice.  (00:21) Tim Beyers and Dylan Lewis discuss: - Why Starboard Value is putting Autodesk’s management team and board on notice. - Broadcom’s 10-for-1 stock split, and why the 90s are alive and well in tech. - Nvidia CEO Jensen Huang’s advice for graduates at Caltech and wisdom from 30 years at the helm. Then, at (18:02) Ricky Mulvey talks with Bryce Tingle, business law professor and author of the new book, “Hard Lessons in Corporate Governance,” about Elon Musk’s big pay raise. Companies discussed: ADSK, AVGO, NVDA, TSLA. Catch Jensen Huang’s Caltech commencement speech here: https://www.youtube.com/watch?v=-qXDdToZHzE&t=3138s Go to www.monarchmoney.com/fool for an extended 30-day free trial. Host: Dylan Lewis Guests: Tim Beyers, Ricky Mulvey, Bryce Tingle Producer: Mary Long Engineers: Dan Boyd, Dez Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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Tim Byers. Tim, what's the caffeine situation looking like? This is a no-caffeine day, Dylan. This is a dangerous day to do an episode of Motley Fool Money, but I'm going in anyway. You know what? I'm still hearing the excitement, and I'm happy to hear it. You are here today, so we're going to keep things tech-related with the show. We have some more activist action. We have some wisdom from tech's biggest CEO of the moment, and a dive into Elon Musk's pay package. Why don't we talk with the activists here first, Tim. Autodesk is in the news because Starboard Value disclosed a $500 million stake in the architecture software company. They submitted their letter to the board,

and they're pushing for some changes. Let's dig in. Tim, what does Starboard want to see? Well, first, it's not just what Starboard wants to see, it's what they're suing to see, Dylan. So, for those who don't know, Starboard Value is a fund that, they are an activist investor, like you said, they invest in a lot of different companies. They invest in situations where they believe there is untapped value, and in order to get that value unlocked, the company needs to maybe change its ways a bit. So, we've seen this in the past, where Starboard has invested in. So, Box was a target a few years ago, for example.

Now, Autodesk has the target on its back, and I think deservedly so. For those who don't know, there was an investigation by the audit committee in which the audit committee disclosed that Autodesk's process for selling its software, they said that it was going to change, that they were going to move to a process of annual billing its customers. and that this was going to be really good for the business. This would be good for free cash flow. And what happened instead is when the business was having a hard time meeting its free cash flow targets, it reverted to type, Dylan. It went back to selling multi-year agreements, which it was actively telling shareholders it was going away from. And so this all came out. And what Starboard is accusing the board of is saying, hey, you told the SEC in early March 2024 that this

was going on, but you didn't tell shareholders until after the window to submit new potential directors, board members for the company. Because remember, the board of directors is elected by shareholders. And so there's a certain window that every company will have or say like, hey, you can nominate a director. As a shareholder, you can nominate a director to the board. What Starboard is saying, you didn't disclose any of this until that window for Autodesk was closed. That isn't right. You should not be allowed to do that. The lawsuit, Dylan, is about getting Autodesk to delay its annual meeting of shareholders so that the process can reopen and starboard presumably can

introduce its own slate of directors that shareholders can vote on and say hey look we've got these three people we think these three people are better they will agitate for the changes we're we're looking for we could talk i'll pause there we could talk a little bit more about the changes they're looking for. But if we're going to go with a headline here, Starboard is first accusing Autodesk of some malfeasance here, and then is saying, we got a big stake because we think Autodesk can do better. Yeah, I think no shareholder wants to hear accounting issues. And this was part of the Autodesk story recently. And you certainly don't want to hear it when it is core to what was really the thesis for a lot of people

for this business recently. You mentioned the struggles that they had. I think shareholders were willing to accept a certain amount of pain. We know that happens when we switch from the licensing model to more of an annual billing model. The trouble that I think a lot of people were running into was, the company was not performing, and you look at the stock itself, not outperforming the S&P by any stretch over the last year, over the last three years, over the last five years, it feels like there's quite a bit of credence here to what Starboard is saying with how the company is being run outside of the accounting issues themselves. Yeah. I forget the name of the movie,

but there's a line in a movie where it's about... in fact, I think I may be quoting Gross Point Blank here, in which Martin Blank, John Cusack says, if I show up at your door, you probably did something to bring me there. If starboard value shows up at your door, you did something to bring them there. And you were exactly right, Dylan. That's what's going on here. Starboard value doesn't show up unless you do something to bring them there. And what they did, dramatic underperformance, poor use of capital. And then the final straw was this investigation and then failure to adequately disclose. What Starboard Value is saying, getting back to your other question, they believe that

Autodesk has a lot of room. They say they've got best-in-class gross margins, but their operating margins are terrible. There's a lot of cost-cutting that is available to Autodesk. Starboard Value, without saying it. They're not going to say the quiet part out loud. But the quiet part is, you have to lay a bunch of people off. That's a big part of it. Go ahead. What's interesting is, it seems like, from your perspective, there is a lot to what Starboard Value is saying. Absolutely. But $500 million stake in a $50 billion company, that's 1% ownership here. And as activists go, you know, that's not a ton. The market was happy to see Starboard get involved.

Shares are up 5% today on the news. But how realistic do you think it is for anything to change? There's going to be a lot of pressure on Starboard. And especially if this suit does go through, Starboard is going to start rallying other institutional shareholders to its slate of directors. And it's going to put a lot of pressure on Autodesk, because they don't have to be the ones. It's not their shares that are going to get their directors to the board if a court agrees and reopens the nominating process. It'll be a bunch of other institutions, pension funds, big money managers that look at what Starboard is saying and say, yeah, you know what? I'm going to vote my shares on those Starboard board members. And if that happens, then you are going to see

meaningful changes. They do have a record of enforcing some changes, at the very least, the public pressure that they tend to put on companies. I mean, when they did this with Box, they didn't win everything, but Box started to clamp down. They got a lot more efficient, and that stock has responded since Starboard got involved with that company. So, I would expect that there will be cost cuts. I expect there will be at least some kind of resolution and changes in the structure of the board. I think at least those two things are going to happen, Dylan, and maybe a resetting of expectations around what you will see from Autodesk over the next couple of years. As I mentioned, we're talking all things tech today. This happened last week,

but I wanted to get your take on it. Broadcom announcing a 10-for-1 stock split last week, following their fellow chipmaker, Nvidia. Tim, dividends and stock splits are back in style in tech. What year is it? Is it 2000? I don't know. I thought it was 2024. I thought it was 2024. But, yeah, The last time stock splits were showing up with this kind of regularity, it was during the dot-com era. I think back then, it was even more frantic and outrageous. But we have reached this period, Dylan, where we've pushed splits out of the limelight for such a long period of time, that now we have reached the point where, hey, we can't just do two-for-one splits,

you're not doing it right unless it's at least 10-for-one. I can understand that, because there are some stocks where adding some liquidity into the market by virtue of a bunch more shares that opens up the options market for them, it doesn't really create affordability because of fractional shares, but there are some investors who are like, hey, if I got $100, I want to buy a whole share of something. I don't want to buy a fraction of something. It creates the perception of affordability. Yeah, it's a little strange that we're seeing this now, but I think it's just pent-up demand. Stock prices have gone. many stocks in the thousands per share. Now, we've reset it a little bit and get investors

thinking like, hey, you can afford to buy a share of this. So, yeah, it's interesting to see it, but boy, does it harken back to those days, which is a little terrifying, Dylan. Yeah, I was going to say, the main difference between the dot-com era and now is the rise of fractional shares. And yet, we have seen so many very big, very prominent companies going through stock splits recently. Is that a nod to the inevitability, the enduring element of investor psychology with this stuff? Of course it is. Of course it is. We see this all the time on Motley Fool Live. We see it on the discussion boards. There is a perception that if you're a small investor and a stock trades in the thousands upon thousands

of dollars, that comes across to you as unaffordable. Fractional share buying, that's something that people learn and they adopt, but it takes a little work to adopt it. You have to get your head around it. What you think is like, hey, if I want to buy a share, I got to come up with $2,500 or whatever it is. Splits do help with investor psychology in that way. But as we all know, they create bupkis, no value whatsoever. I do want to use this as a chance to check in on Broadcom a little bit. It is one of those companies where share price is over that four-figure mark. That's because it's gone on a heck of a run, up 2,400% over the past decade, up over 100% over the past year. Not a name that we talk about a ton here, Tim.

But in a space that's very interesting and has gotten so much attention, especially in the last couple of years. Is this a company people should be paying a little bit more attention to? Sure. It's an infrastructure company. It's on the Rule Breaker scorecard. The reason it doesn't get nearly as much love is it's really complicated and it is a mess of stuff. It's infrastructure, but it's a lot of stuff that's come together. But all of that stuff, particularly in the moment we're in, where we are absolutely obsessed with hardware and hardware buildout and infrastructure buildout for AI, yeah, Broadcom is a stock of the moment. But it's also a good business. And it had a long period of time where it just wasn't getting nearly enough stuff

here. But just to give you a sense of how messy this thing is, they do everything from systems on a chip to hardware components to optical networking. It's just all of the things. It's lots of infrastructure stuff. It is highly useful, highly interesting, well-run business, but very confusing. It doesn't have the zip of most of the tech companies that have a snazzy one-liner. That ain't Broadcom. It gets overlooked. You know what? Sometimes those are some of the best businesses to take a look at. You know who does have that zip, Tim? You know who does have that immediate name recognition? I know where you're going with this.

NVIDIA. They are the inevitable company of our time, of our moment. Jensen Huang spoke at Caltech's commencement this week. I wanted to talk through some of his comments, Tim, because you are one of the sources of wisdom and investing mindset conversations here at The Fool. I thought it might be fun to reflect on some of his comments. because it was, I watched the whole speech, a tour of the last 30 years of tech, but also managing innovation, managing business pivots. There was a lot of really great stuff there for investors. Here's the thing that I want to focus on.

I'll be curious of what other quotes struck you, but one that struck me was the story of the Japanese gardener that he met. As I heard him talk about how this Japanese gardener who was doing really minute pruning of a bamboo garden in Kyoto, Japan, and it looked like he really wasn't doing anything. Jensen Wang went up to him and said, what are you even doing? It doesn't look like you're doing anything. He was using these tiny little tweezers to do little bits of pruning. He's like, how can you do that? This garden is so big. I've been doing this for 25 years. I have plenty of time. And so, it just reset perspective for Jensen. Like, I have plenty of time, particularly,

and this is what he said the lesson was for him as he starts his day with his most important work. So, then the remainder of the day is free to him to do what is important in that moment, including meeting with all of his employees. So, I thought that was fascinating. put a little pressure, I'd be like, oh, okay, thanks for upping the game on me a bit. But, I mean, that's an interesting bit of wisdom, and wisdom can be found everywhere. Yeah, what do you have booked for 9 a.m. tomorrow, Tim? What are you working on? Yeah, right, yeah, exactly.

Yeah, thanks, no pressure. I zoomed in on the same quote there, and I think there's wonderful career advice in there, but I think it's incredibly applicable to investing in our style of investing, to say, I have plenty of time. Especially someone who has lived that, he has been the executive there for 30 years. As we look out on our own investing journey, it doesn't seem like we are doing much day-to-day as we are adding small amounts of money to our portfolios, whether it be in our 401ks or putting new money to work in our brokerage accounts. But over time, it builds up, and we have plenty of time for that to happen. But the important thing that you said there,

and I'm going to double underline it, is in investing, particularly in long-term investing, you do your work and then doing nothing is doing something. I'll say that twice because it's so important. Doing nothing in long-term investing is doing something. And here's the reason for it. You aren't getting in the way of compounding. You don't want to get in the way of compounding. It'll compound on its own if you let it, if you don't let it get in the way. So doing nothing actually is doing something. And then just kind of picking your spots, like really focusing on, if you focus your attention on what are the ways that this business creates value, and then all you're going to

do is just measure that and not try to measure everything, you're doing the work and not killing yourself in the process. So there is something about that, this idea of just relentless focus and not overdoing it. I mean, I can always use that reminder. Although, man, I mean, is that guy just too cool for school or what? He finds 48 hours in the day, I swear. I don't know how he does it and manages to look cool in a leather jacket at the same time. Just unbelievable. Listeners, we'll drop the link to his full commencement speech into the show notes. Tim, thank you so much for wading through all things tech and mindset today with me on the show. Thanks, Dylan. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask

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to bryce tingle a business law professor and corporate governance expert on whether this pay package is a win for tesla shareholders and how incentive pay for ceos has shifted in recent decades. Bryce, you have a book. It's called Hard Lessons in Corporate Governance. Last week, we got a lesson in corporate governance, and that was with Elon Musk, the CEO of Tesla's pay package. Tesla shareholders voted to uphold a 2018 decision that essentially gets Elon Musk $48 billion in his pay package. You've studied CEO pay. You've studied a lot of corporate boards and decisions. What was your reaction to seeing that go through? This whole situation is so incredible that a year ago, if I had given it to law students

in a final exam, there would have been protests with the dean. The fact that the shareholders has approved a pay package, which has already been earned out and then disqualified. The fact that we have no idea whether or not the shareholder vote is going to be at all useful in the legal maneuverings in Delaware, it's just all fascinating. Why are there multiple votes on this on a straightforward basis? It seems that this was approved in 2018, and then it was brought down by a Delaware judge, and now it's getting voted on again. Why didn't it go through originally? It seems like the shareholders may have had sort of a contract with the CEO of Tesla. Yeah, that's a really great question. And I think it's the view of most

sort of average investors is this pay package was fully disclosed. It was talked about in the media. The shareholders already approved it. So it seems strange that six years later, Delaware court would throw it over. The Delaware's court's concern was that Elon Musk is essentially the controlling shareholder of Tesla. And as a controlling shareholder, Tesla had not done an adequate enough job disclosing the degree of influence Elon Musk had over the process that resulted in this giant option award. It was worth, I think, at its peak, about $56 billion. It's a strange view to the average investor, because the average investor doesn't understand the degree to which director independence, the independence of processes, have become

sort of central to Delaware law and corporate governance generally. Another piece of this vote was that shareholder advisory firms, and there's two big ones, ISS and Glass Lewis recommended voting against this pay package. And usually these institutions have a large influence on corporate proxy battles. What role do these firms usually play in these kinds of votes and how did it, you know, why was there such a contradiction here? So proxy advisors, their business model is catering more or less to the prejudices of their clients, which are the institutional shareholders. And Tesla is unusual in that only about half its stock is owned by institutional shareholders. The other half are owned by retail

shareholders. We have lots of evidence that the interests of the fund managers who manage institutional shareholders differ from the interests of the flesh and blood human beings that own the shares. So we know, for example, that the flesh and blood human beings care a lot more