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For a number of years, Progress Software (NASDAQ:PRGS) has been something of a work in progress. Historically, the company had acquired fairly independent software businesses, albeit with discipline, and operated them as autonomous entities, allowing the cash flows to aggregate up to the corporate parent. This conglomerate structure originally had an appeal to investors on a lower scale, though the lack of synergy ultimately forced management to rationalize the business into its present operating structure, one that is still focused on three separate offerings.

Stocks being fairly innumerable, it is easy for an analyst to lose track of a company in transition as we are focused (hopefully before others) on those stocks that are poised for a dramatic change. It was thus with interest I listened in on the fourth-quarter earnings conference call a few weeks ago for an update on the company's prospects. And a work in progress it still is. Jay Baht had joined as CEO just 30 days previously from Autodesk. But he had clearly hit the ground running, offering fresh insights on operating and cultural issues within each of the businesses. He also announced key management changes. That said, revenue was down, operating expenses up and key segment initiatives just underway. Clearly it was way too early to recommend this stock, despite its low valuation. So I moved on.

Now, Starboard Value LP has taken a 5.1% position and delivered a public letter to Mr. Baht decrying the company's conglomerate structure and the deeply depressed stock valuation it has produced. Written by the firm's Jeffrey Smith, the letter offers a lucid analysis of the operating segments, credibly stating that the Application Development Platform business alone (its largest and most profitable) is likely worth more than the company's traded value. With this stated observation, the stock is up 15%. In fact, since falling to $17.69 in the wake of the earnings call, the stock has appreciated 33%.

Starboard's investment has generated a nice paper gain, just with the splash of its announcement. Still to be understood, however, is the path from the company's present strategic orientation. Mr. Baht announced a renewed focus on strategy and corporate development intended to augment current businesses through adroit M&A. He seems ready with numerous operating initiatives as well.

With an activist investor in the mix, one seemingly inclined to break the business up, the outlook is clouded, however. Even a down-and-dirty breakup valuation suggests a stock price of about $25 a share, just a bit above where it now trades. Yet the arduous work of achieving this valuation, through either a turnaround of the existing businesses or some combination of acquisition and divestiture, lies ahead. For now, I will be watching with interest. The road may well be bumpy; better entry points could be ahead.

Source: Activist Investor Calls On New Progress CEO