Elliott Ratchets Up CDK Campaign to Boost Margins, Buybacks

  • Activist sends letter to CDK outlining turnaround proposals
  • Private equity firms said to remain interested in company

Elliott Management Corp. is ratcheting up its activist campaign at CDK Global Inc., pressing the provider of information technology to auto dealers to boost margins and increase buybacks.

Since the company was spun off from Automatic Data Processing Inc. in 2014, “little has been done,” with minimal progress in cutting costs, improving profitability and boosting shareholder returns, Elliott wrote in a letter Wednesday. Last year, CDK held talks with private equity firms.

While those firms are frustrated with the process, they remain interested in taking CDK private, people with knowledge of the matter said this week, asking not to be identified because the information is private. Pressure for a sale may increase if the operational turnaround languishes, the people said. CDK’s margins lag smaller competitor Reynolds & Reynolds, a company taken private by Vista Equity Partners in 2006, which Vista sold in 2014.

‘Urgent Action’

Elliott, which said it owns 8.6 percent of CDK, urged new Chief Executive Officer Brian MacDonald, who replaced Steve Anenen in March, to restructure quickly.

“We strongly believe it is time to take urgent action to address the opportunities that have existed since CDK’s separation from ADP,” Elliott wrote. “Despite being public for 19 months, CDK’s previous management made very limited progress executing on the two clear and fundamental points of value-creation: margin improvement and capital allocation. We believe that the delay has hurt CDK and that much more needs to be done.”

CDK was working with Morgan Stanley to explore the potential for a sale after receiving unsolicited interest, people familiar with the matter said in August. It’s attractive to private equity buyers because of its strong recurring cash flows from auto-dealer subscriptions and the opportunity to reduce costs.

The Hoffman Estates, Illinois-based company generates more than $2 billion in revenue annually, providing technology to more than 27,000 automobile and heavy-equipment dealers worldwide. The shares climbed 4.8 percent to $49.30 at the close in in New York, giving the company a market capitalization of about $7.7 billion.

CDK quickly attracted activist hedge funds within its first year of public trading. Alongside Elliott, sometimes-activist Sachem Head Capital Management and hedge fund Fir Tree Inc. are among its top holders.

“This lack of progress has created a credibility gap with investors and also has real business implications, including employee uncertainty as they are forced to head to work each day aware that there is a ‘restructuring’ going on without any end in sight,” Elliott said in the letter.

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