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Elliott Management Sends Letter to Board and Management of CDK Global

NEW YORK, May 04, 2016 (BUSINESS WIRE) -- Elliott Management Corporation (“Elliott”), which manages funds that collectively own 8.6% of the common stock and equivalents of CDK Global, Inc. CDK, +4.83% (the “Company or “CDK”) today sent a letter to the Board and Management of CDK outlining the opportunity for compelling value-creation that exists at the Company. The letter introduced a Value-Maximizing Plan, showing how optimization of both CDK’s operations and its capital structure could generate an increase in the Company’s stock price of more than 70% within 14 months. The letter can be viewed at http://elliott-graphics.com/CDKletter.pdf.

Full text of the letter follows:

May 4, 2016

The Board of Directors
CDK Global, Inc.
1950 Hassell Road
Hoffman Estates, IL 60169
Attn: Chairman Leslie Brun
Attn: CEO Brian MacDonald

Dear Les, Brian and Members of the Board:

I am writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together, “Elliott” or “we”), which collectively own 8.6% of the common stock and equivalents of CDK Global, Inc. CDK, +4.83% (the “Company” or “CDK”), making us one of the Company’s largest shareholders.

Over the past year, we have participated in an ongoing private dialogue with the Company, particularly with Chairman Les Brun and CFO Al Nietzel. We have also had the chance to spend time with Brian MacDonald since his appointment as CDK’s new CEO in March. We have enjoyed this dialogue, and we look forward to continuing it. We have enormous respect for Les, Brian and Al, and we think their combination of skills and experience could be critical to realizing the significant opportunity in front of CDK.

The purpose of today’s letter is to share our thoughts on this compelling opportunity and to lay out a plan for CDK to optimize its business operations and drive a meaningful improvement in shareholder value. As the leader in the Dealer Management System (“DMS”) market, CDK possesses a uniquely attractive business, selling mission-critical software on a subscription basis to sticky auto dealership customers with long-term contracts. However, our extensive public diligence has confirmed that CDK’s operations remain vastly under-optimized, which is affecting both business performance as well as valuation.

In fact, CDK has the opportunity to enhance its EBITDA margin profile to 42% in FY2018 from its current 24% margin and to re-orient its capital structure to one more appropriate for its durable, subscription-based business. For shareholders and employee shareholders, such optimization, if executed correctly, should yield a stock price of ~$81 within 14 months, a 72% increase to the current price.

For Brian and his new management team, we view this moment as a unique opportunity to embark upon a new era of outperformance at CDK under their leadership. The letter is organized as follows:

  • We begin by introducing the situation briefly. CDK has a uniquely attractive business, despite being spun out of ADP with an operational framework and capital structure that are not optimized for a market-leading vertical software business.
  • Next, we focus on the progress to date. Despite the clearly identifiable opportunity, CDK has not yet taken any meaningful steps to pursue an optimization of its business operations and capital structure.
  • We then discuss the value-maximizing path forward. CDK can and absolutely should take steps to realize the margin-improvement and capital-return opportunities at hand. With CDK’s main competitor running its North America business at EBITDA margins of ~55% (versus CDK’s ARNA segment at just 30%, with corporate overhead fully allocated in both figures) and exhibiting healthy growth recently, there is significant opportunity for CDK management to improve its target margin profile.
  • Finally, we address the road ahead. We believe that given the time lost since CDK’s spin-off, progress cannot be delayed any longer. Expedient implementation of the Value-Maximizing Plan laid out in this letter would upgrade the organization, streamline the operations, optimize the capital structure and position CDK for growth. Unless the Board plans to run a process to fully explore the existing strategic and private-equity interest in acquiring CDK, it should commit to the Value-Maximizing Plan without reservation.

As active investors in the technology industry, we have considerable experience investing in software companies, and we have put a tremendous amount of resources and time into researching these recommendations. We thank the entire Board and management team for its consideration of our thoughts and welcome any questions.

About Elliott

Elliott is an investment firm founded in 1977 that today manages approximately $28 billion of capital for both institutional and individual investors. We are a multi-strategy firm, and investing in the technology sector is one of our most active efforts and one in which we have built a long track record. Elliott’s current and prior investments in software companies include Citrix, Qlik, Mitchell International, Informatica, Novell/Attachmate, BMC Software, MSC Software, Compuware, E2Open, EMC/VMware and many others. Through years of experience operating, investing and sitting on the boards of software companies, we have developed significant in-house expertise not only in understanding the business models, growth prospects and competitive dynamics of horizontal and vertical enterprise software companies, but also in achieving operational excellence across sales and marketing, product development, support and implementation functions. Over time, we also have formed strong relationships with senior executives and expert consultants and advisors across the space, which have informed our viewpoints.

Our approach to CDK is consistent with our approach to many of our current and previous technology investments. We have conducted extensive public research to better understand the Company’s operations and strategy, including working with respected technology and management consultants to examine the broader DMS and Digital Marketing markets and CDK’s position within those markets. We have also worked with industry experts and IT buyers at dealership groups to examine and assess the capabilities and competitive positioning of CDK’s products and technologies across all of its offerings. Our efforts included a survey of over 450 IT buyers at various dealerships, enabling us to better understand the DMS landscape from a buyer’s perspective and to identify what factors are most important in driving purchasing behavior. We have also retained experienced and proven C-level executives with technical and operational capabilities in the software and broader technology marketplaces to advise us on higher-level corporate considerations. Finally, we have retained several performance-improvement consulting firms, which have conducted public research to evaluate CDK’s operational efficiency and have developed specific recommendations across all functional areas.

We believe this time- and resource-intensive exercise has given us a strong understanding of the markets in which CDK participates and has resulted in well-researched recommendations for creating value. We believe these recommendations will significantly improve CDK’s business and drive substantial shareholder value-creation over time.

CDK: A Unique Opportunity

As we have written to the Board previously, CDK has an extremely compelling business model. It leads the DMS market in North America with over 40% market share, generates a highly attractive annuity stream through its subscription-based suite of software applications and enjoys a sticky, diverse customer base with an average DMS client tenure of 20 years. This customer stickiness is driven by the mission-critical nature of its DMS offering, the quality of its products and CDK’s long-term customer contracts – all of which make CDK’s subscription revenue stream grow nicely during good times while remaining incredibly resilient during economic downturns. Indeed, from the perspectives of both business-model quality and the magnitude of its value-creation opportunity, CDK is one of the most attractive software businesses we have invested in to date.

However, it is not surprising how and why the current state of affairs exists at the Company. Based outside of Chicago, CDK was a division of ADP, a large payroll-services company headquartered in New Jersey, for 42 years. ADP senior management took a hands-off approach to managing the division as long as it achieved its single-digit revenue-growth goals and demonstrated a small amount of margin expansion annually. The division was never optimized as a vertical software business, primarily because its management team did not hail from the software industry and did not have strong incentives to meaningfully improve the division’s operational effectiveness and productivity. Furthermore, when the...


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