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Cognizant reaches agreement with activist hedge fund Elliott

The company will also change the composition of its board. Three existing members of Cognizant’s board will not stand for re-election.

, ETMarkets.com|
Last Updated: Feb 08, 2017, 07.40 PM IST
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In its fourth-quarter results press release, Cognizant said it would target a 22% non-GAAP operating margin in 2019.
In its fourth-quarter results press release, Cognizant said it would target a 22% non-GAAP operating margin in 2019.
BENGALURU/DELHI: Cognizant said it had reached a co-operation agreement with hedge fund Elliott Management and would return $3.4 billion to shareholders through a share buyback program and a dividend and would target a stronger margin.

The company will also change the composition of its board. Three existing members of Cognizant’s board will not stand for re-election. 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 program,” 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 optimizing 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.

Its 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 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 shifting to higher value services, selectively pursuing new deals and creating operating leverage through higher utilization, automation and pyramid structure would help it boost its margin. The company also plans to tackle business unit overhead and corporate overhead. The steps are expected to add between 360-440 basis points to its margin

The Teaneck, New Jersey-headquartered firm said its talent strategy and current industry pricing trends would shave off 120-200 basis point of the margin.

Cognizant’s co-operation with Elliott will likely pile on the pressure on its Indian rivals who are also facing investor demands for buybacks to boost their return. ET has previously reported that Elliott’s letter to Cognizant has sparked a flurry of similar requests being sent to Indian IT firms.

Mindtree has already said it is considering options, other than dividends, to boost shareholder returns.

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