Spear Point Capital Partners LLC
400 Poydras, Suite 2100
New Orleans, LA 70130
December 5, 2014
The Board of Directors
1 Imation Way
Oakdale, MN 55128
Re:The Party is Over: The Board Must Answer to Shareholders
Dear Members of the Board:
As we2 continue to explore how to best create value at Imation Corp. (IMN) ("Imation" or the "Company"), Board compensation relative to performance remains a key issue. On November 25, 2014, the Company announced that the Board of Directors had made certain changes to Directors' compensation. This action follows on the heels of our November 6, 2014 letter to shareholders in which we noted excessive compensation obviously devoid of any contingent relationship to financial performance. As the following research shows, the token changes in compensation are inconsequential gestures that for the Company's owners amount to insulting window dressing and indicates a disturbing lack of regard for the interests of shareholders. This utter cluelessness leads us to believe the Board by and large needs to be replaced.
To be clear, the announced changes amount to slightly more than a 10% potential reduction in total Board compensation after the changes take effect in May 2015. By comparison, shareholders have lost 33.5% of their value during the first 11 months of this year alone.3 Numbers like these only underscore the lack of seriousness with which this Company is being run. It would be humorous if it weren't for the unbelievable audacity of making such paltry changes. The Board still does not understand the extent to which they have mismanaged the Company. It is as though the house is on fire and they are out weeding the garden.
Board Compensation and Performance
Since the Company's inception, the Board of Directors of Imation has gouged shareholders with Fortune 500 levels of compensation for the Board while consistently delivering negative returns to shareholders. Rather than focus on the entire life span of the Company, we would like to highlight the Company's performance and compensation to Board members for the period in which the longest serving Board member, Mr. L. White Matthews, III, began his tenure on February 5, 2003. The following graph speaks volumes about the scale and consistency of failure displayed by the Board:
Graph 1 - Shareholder returns during L. White Matthews, III's tenure on the Board
The Company last paid a dividend of $0.08/per share on December 11, 2008. The stock price began 2008 at $20.39/share, and ended the year at a dismal $13.57/share. The following chart shows Mr. Matthews' total Board compensation relative to the share price of the Company since 20064.
Graph 2 - Matthews' annual compensation relative to Imation stock price ($US)
After the Company ceased dividend payments, Mr. Matthews' compensation the following year declined from $314,434 in 2008 to $184,638. However, in 2010, his compensation spiked up despite a continued erosion of share value. On May 9, 2011, Mr. Matthews' was named non-executive Chairman of the Board, resulting in even higher levels of compensation. In 2013, Mr. Matthews received a whopping $443,000 in compensation for a NON-EXECUTIVE CHAIRMAN role while the shareholders saw the share price reach new lifetime lows5. Thus, since 2009, Mr. Matthews' Board compensation more than doubled while shareholders suffered a 77% decline in market value for the Company6.
As depicted in Graph 1 above, the performance is even more dismal if one goes back to the beginning of Mr. Matthews' tenure on the Board in 2003. During that period, shareholders witnessed 92% of the Company's market value vanish into thin air while Mr. Matthews pocketed more than $2.6 million in total compensation from the Company. Not bad for a few meetings a year. To put this outrageous compensation into perspective, for the eight meetings a year he is expected to attend via phone or in person, Mr. Matthews is paid more than the annual US median household income - FOR EACH MEETING. According to the US Census Bureau, the median US household income in 20127 for a family of four was $51,371. By comparison, in 2013, Mr. Matthews' $443,000 in compensation results in an average of $55,375 per meeting, assuming eight meetings per year.
Looking at Mr. Matthews' compensation another way, the following chart compares his cumulative compensation since 2006 with the total value of the Company:
Graph 3 - Mr. Matthews' cumulative compensation compared to Imation market capitalization
(Market Cap in $000,000's, Cumulative Comp in $US)
Sadly, shareholders have seen the value of their Company reduced from $1.58 BILLION when Mr. Matthews joined the Board, to a woeful $130.6 MILLION as of this writing. During this time, it is important to remember that the Board approved spending over $800 million of shareholder money on numerous acquisitions, which have failed to increase shareholder value.
Fortune 500 Pay for Horrible Results
Mr. Matthews' compensation is clearly unhinged from performance and dare we say, reality. To prove the point, we compared Imation's Board compensation and performance with three separate peer groups. The first group consisted of 18 companies listed in the Company's own 2014 proxy statement that were used to justify executive compensation8. The second group comprised 10 Minnesota based companies as ranked by revenue by the StarTribune9. The final group consisted of four Fortune 500 companies, including Imation's erstwhile parent company 3M (NYSE:MMM). The results are disheartening at best.
Table 1 - Imation Compared to the Proxy Peer Group
(Market Cap and Revenue in $000,000s, Comp in $000s)
The first thing to note is that the average market capitalization of a comparable company according to Imation is $10.4 billion and the average revenue is $5.1 billion! On what planet does comparing these giant companies pose a reasonable peer group for setting compensation at a $132 million company? But the good news is that it is generally easier to produce higher returns on a small capital base rather than a large one, so clearly one would assume Imation is outperforming the group of companies. However, the Company posts the second to worst returns of the entire group. Despite the embarrassing returns, the Board still sees fit to pay themselves more than all but five of the companies in the peer group. It should be noted that the five companies that exceeded Imation's level of compensation returned an average of 168% to shareholders during the five-year period and have an average market capitalization of $21.50 BILLION.
Also of note, Imation Board members received the fourth highest average cash component for Board membership. The four companies paying their board members higher levels of cold, hard cash also managed to deliver an average of 243% to shareholders, compared to -63% for Imation.
The only company in the peer group to perform worse than Imation was Overland Storage (NASDAQ:OVRL) with a -64% return. However, at least the Overland board had the decency to pay themselves a relatively modest fee as they attempted to turn the company around (average of $43,000 in cash and $50,000 in non-cash compensation).10
Imation Compared to a Peer Group of Minnesota-based Public Companies
The StarTribune publishes an annual list of the largest publicly traded companies in the state of Minnesota and as ranked by revenue at the time of publication. In that list, Imation appeared at number 35. We took the five companies immediately ahead of Imation and the four behind them on the list and compared compensation and performance. The results were sadly consistent with the previous analysis.11 Note, the trailing twelve-month revenue listed below is as of the third quarter of 2014. Since the list was published, Imation's revenue has dropped from $860.8 million to $765 million and was the only company on the list to see revenue decline.
Table 2 - Imation Compared to a Peer Group of Minnesota-based Public Companies
(Market Cap and Revenue in $000,000s, Comp in $000s)
Imation was also the ONLY company to post negative returns in the last five years, compared to an average of 206% for the peer group. Outrageously, Imation far exceeded every company on the list with regard to Board compensation, posting an average of $287,400 per board member compared to an average of $152,300 for the peer group. The same was true of the cash component paid to board members, with Imation averaging $98,000 compared to an average of $63,000. The only company that came close to Imation's regal cash compensation of board members was Select Comfort, which posted a nifty gain of 428% during the five-year period.
Imation Compared to a Selected Group of Fortune 500 Companies
Next, we decided to compare the board compensation levels at some of the largest, most well known companies in the world with Imation's board compensation. We selected Apple Inc. (NASDAQ:AAPL), because with a market capitalization of $674 billion, we assume their board members would be paid most handsomely (and deservedly so). We also selected Target Corp. (NYSE:TGT), United Parcel Service, Inc. (NYSE:UPS) and 3M Company.
Table 3 - Imation Compared to a Selected Group of Fortune 500 Companies
(Market Cap and Revenue in $000,000s, Comp in $000s)
With an average market capitalization of $235 billion, it would seem pointless to compare a tiny company like Imation with these global behemoths. However, as the table clearly shows, only a board member of Apple receives annual compensation higher than the elite group at Imation. The comparison to 3M is particularly telling and would be humorous if it wasn't so pathetic.
We find it shocking that the average board member of 3M, Imation's former parent, gets paid less to guide a $100 billion company. How is this even possible? Clearly, the absurdity of this is lost on the Board. It is time shareholders fought back.
Recent Changes to Board Compensation
On November 25, 2014, Imation filed an 8-K report noting changes to Board compensation. In addition to other items, the changes included a reduction in restricted stock grants per Board member from $175,000 to $150,000 per year and a reduction in the additional cash and restricted stock grants for the non-Executive Chairman from $87,500 to $75,000 each. We estimate these changes will result in an annual reduction in total Board compensation from $1,454,000 to $1,304,000, or $150,000 annually in cash and stock.12 This represents a 10.3% reduction in cost. This is laughable compared to the $63 million lost by shareholders during this year alone.
Kept intact is the $7500/year each Board member receives in matching funds for their charitable contributions. We applaud giving back to the community, but why should the long-suffering shareholders of Imation match funds from an egregiously overpaid and underperforming Board of Directors? If the Board could find a way to create shareholder value, the many shareholders of Imation would be in a position to make charitable contributions of their own choosing rather than providing free money to make our Board members feel generous and important.
Also left intact is a $1500 fee for Board members when they interview potential Board candidates. Of course, $1500 per interview doesn't sound like a lot. However, each nominee would probably be interviewed by every Board member, so it adds up. Also, there are plenty of opportunities to interview candidates because the turnover on the Board is not insignificant. This year alone, two Board members abruptly resigned. The latest being Trudy Rautio on August 8, 2014, just weeks after she was re-elected to another three-year term at the Company's shareholder meeting on May 7, 2014. The Board then replaced her with Mr. Anthony Brausen, who appears to have little relevant expertise for a company focused on digital storage. In making the appointment, the Board noted his financial expertise and said he would be an ideal candidate to lead the Company's audit committee.
We do not know Mr. Brausen and we presume he is a fine man. However, in our opinion the Company should have found someone with both accounting expertise and relevant experience in the digital storage industry (a skill set sorely lacking on the Board). It appears to us that Mr. Brausen's real qualification for the riches bestowed on Imation's Board are that he lives and socializes in the right circles in Minnesota. The Bloomberg Businessweek web site lists Mr. Brausen's qualifications as follows:
- December 2011 to the present - Senior Vice President of The Mosaic Company, which the Company notes is one of the world's leading producers and marketers of crop nutrients.
- Prior to The Mosaic Company, Mr. Brausen served in a range of senior financial and accounting roles at Tennant Company, which the Company notes is a global leader in manufacturing, marketing and servicing industrial, commercial and outdoor cleaning equipment.
- Finally, Mr. Brausen worked at International Multifoods Corporation, which is a global processor and distributor of food products for the foodservice and consumer sectors.
It appears to us that none of this experience will be terribly helpful in transforming Imation into a valuable company. For the money we pay the Board, we should expect Board members that add more value than simply accounting skills.
For nearly 20 years, the Board appears to have been run mainly like a club for privileged Minnesotans at the expense of shareholders and Mr. Brausen's appointment merely perpetuates that image. We do not blame Mr. Brausen for wanting to join in the Board fun and make a fortune running a once great company into the dirt, but we do not believe he is the best-qualified person for the position. As such, we believe he should resign immediately.
The following table details the miniscule changes made to Board compensation.
Table 4 - Recent Changes to Imation Board Compensation
These non-material changes will do little to change the course of Imation. Rather than rearranging the furniture on the Titanic, we need a wholesale change in the personnel, skills, attitude and sense of urgency at the Board. Rather than hire another good ol' boy from Minnesota to head the audit committee, the Company should find someone with relevant accounting experience AND experience in what it takes to perform a major turnaround at the Company. The Company must also find Board members with real-world experience in the digital storage industry. As we have said before, the status quo has to go.
As a shareholder of Imation, we call on the Board to take the following actions:
- Ask Mr. L. White Matthews, III and Mr. Anthony Brausen to resign their board seats immediately
- Agree to give Spear Point the right to appoint qualified individuals to fill Mr. Matthews' and Mr. Brausen's seats that will serve the interests of fellow shareholders
- Reduce the cash and non-cash components paid to Board members even further than the meager cuts recently announced and eliminate some fees altogether. Specifically:
- Reduce annual retainer for all Board member to $30,000 from $50,000
- Reduce annual restricted stock grant to $30,000 from $150,000
- Reduce non-executive chairman fee to $30,000 from $75,000
- Reduce non-executive chairman restricted stock grant to $30,000 from $75,000
- Reduce nominating and governance committee chairman fee from $10,000 to $5,000
- Eliminate all attendance fees and interview of board candidate fees- the annual retainer IS your attendance fees and interview fee
- Eliminate matching gift charitable contributions
- Eliminate the staggered board structure and allow shareholders to replace the Board en masse if that is what they want to do
If the Board would adopt our proposed fee structure for members, annual Board compensation would be reduced from the current level of $1,575,000 to a more reasonable $405,000 per year. Even after the new changes take effect in May 2015, the total annual cost will be $1,200,000.
We would like an indication of whether the Board will take these steps by December 15, 2014.
Spear Point Capital Partners LLC
/s/ Rodney A. Bienvenu
By: Rodney A. Bienvenu
Its: Managing Member
Notice and Disclaimer: As of the publication date of this letter, Spear Point has a long position in and may own options on the stock of the Company and stands to realize gains in the event that the price of the stock increases. On or after the date hereof, Spear Point may transact in the securities of the Company. All content in this letter represent the opinions of Spear Point. Spear Point has obtained all information herein from sources it believes to be accurate and reliable. However, such information is presented "as is," without warranty of any kind - whether express or implied. Spear Point makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and Spear Point does not undertake to update or supplement this letter or any information contained herein. This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects Spear Point's views as of this date, all of which are accordingly subject to change. Spear Point's opinions and estimates constitute a judgment and should be regarded as indicative, preliminary and for illustrative purposes only. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This letter's estimated fundamental value only represents an estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of Spear Point. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of Spear Point's abilities and beliefs, all information contained herein is accurate and reliable. Spear Point reserve the rights for their affiliates, members, officers, and employees to hold cash, long, short or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that Spear Point has positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the company's common equity is higher than prior to the original publication date. These affiliates, members, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, Spear Point may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. Individuals who prepared this letter are compensated based upon (among other factors) the overall profitability of Spear Point's operations and their affiliates. This could represent a potential conflict of interest in the statements and opinions in Spear Point's documents. The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. Any or all of Spear Point's forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond Spear Point's control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
2 References to "Spear Point" or "we," "us" or "our" are references to Spear Point Capital Partners LLC together with its affiliates.
3 Share price as of December 1, 2014.
4 Although Mr. Matthews has been on the Board since 2003, the Company did not begin breaking out individual Board member compensation until the 2006 proxy statement.
5 Imation's stock price reached a low of $3.41/share on February 8, 2013, and since that has hit a new lifetime low of $2.82/share on September 19, 2014.
6 Mr. Matthews became chairman on May 9, 2011, which accounts for most of the gain in compensation.
7 Source: US Census Bureau. 2012 is the last period for which there is data.
8 It is not clear what comparable companies were used in determining Board compensation, but in our view, if a peer group is good enough to establish executive compensation, it is good enough for Board compensation. Also, Logitech International was listed as a comparable company but was not included in our analysis due to non-standardized compensation presentation in its proxy statement.
9 The Star Tribune 100 is a measure of the largest publicly held companies with headquarters in Minnesota ranked by revenue.
10 On December 1, 2014 Overland merged with Sphere 3D.
11 Listed in order as presented in the report at the time of publication; see here.
12 See Table 4 below for calculation of aggregate amounts.
Disclosure: The author is long IMN.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.