Terry Vine | DigitalVision | Getty Illustrations or photos

Business: eHealth Inc. (EHTH)

Organization: eHealth is a wellness insurance marketplace with a know-how and company system that gives consumer engagement, training and well being insurance policy enrollment alternatives. Their mission is to join each individual human being with the highest high quality, most affordable wellness insurance and Medicare designs for their daily life circumstance. The company operates in two segments: (i) Medicare and (ii) Particular person, Family and Tiny Organization. The Medicare phase signifies most of the small business and constituted ~89% of profits in 2020. eHealth derives much of its revenues from fee payments paid by health insurance plan carriers associated to designs that have been procured by users who used their providers.

Inventory Sector Worth: $1.8B ($70.04 for each share)

Activist: Starboard Value

Percentage Possession:  7.00%

Regular Price: $56.16

Activist Commentary: Starboard is a incredibly productive activist investor and has considerable operational activism knowledge encouraging boards and administration teams operate businesses extra efficiently and enhancing margins. This is their 101st 13D submitting. In those 101 filings, they have averaged a return of 28.88% as opposed to 11.93% for the S&P500. Their typical 13D hold time is 18.1 months.

What’s Occurring:

On March 11, 2021, Starboard sent a letter to the corporation nominating the pursuing four director candidates for election to the firm’s board at the 2021 Once-a-year Conference: (i) Peter A. Feld, taking care of member and head of investigation of Starboard Price (ii) James E. Murray, president and main operating officer of Magellan Health and fitness, Inc. and previous govt at Humana, Inc. (iii) Erin L. Russell, a skilled board member who serves as a board member at Kadant Inc. and Tivity Overall health Inc. and (iv) Steven J. Shulman, former director of HealthMarkets, Inc., a competitor to eHealth and former chairman and CEO of Magellan Health and fitness Inc. Starboard also mentioned that it has engaged, and intends to carry on to have interaction, in conversations with administration and the board relating to numerous products such as the latest funding, financial and working success, and the composition of the board, between other matters.

Driving the Scenes:

Starboard has been seeking at the firm for a even though, but acquired its whole stake in the last 60 times. They acquired their stake with an typical charge of $56.16 (the organization was trading at $151.66 on March 31, 2020), buying their shares following the firm’s share cost plummeted next the information of a questionable funding transaction with H.I.G. Capital.

eHealth has quite a few considerable tailwinds these types of as the child boomers growing older into Medicare, above indexing to Medicare Advantage – eHealth’s most significant enterprise line, and penetration on the internet expanding in the mid-teens as Covid quarantining has lessened the use of physical brokers and have additional clients signing on digitally. However, the firm has not been capitalizing on these tailwinds. Scott Flanders, eHealth CEO, manufactured a major blunder in 2019 by escalating revenue at any price tag, like high acquisition expenditures and brief-expression shoppers, primary to a pretty higher churn, small margins and slow development in contrast to peers who grew at 100% last year. Flanders has questioned the board for a next probability to get it appropriate, and he is acquiring one.

Till a 7 days back, the board has consisted of 7 directors, a bulk of whom have been on the board for more than 12 many years and quite couple of of whom have applicable sector knowledge. Then previous 7 days, Hudson Executive Funds settled its proxy battle with the firm by naming John Hass, previous CEO of Rosetta Stone, to the board. That does not make sense in any language. The organization requires a qualified, knowledgeable board that can assistance Flanders, but also holds him accountable if he is unsuccessful.

That is in which Starboard’s nominees are integral. With the recent addition of a ninth director pursuant to a misguided preferred inventory issuance and a 2nd new director named at the subsequent yearly meeting pursuant to the Hudson settlement, the enterprise will have a few new directors on its ten-human being board.

Starboard nominated 4 administrators, although only three seats will most likely be up this 12 months.

About-nominating administrators is one thing that Starboard normally does to give them versatility in scenario seats are added or if, in this scenario, the firm decides to abide by very good company governance tactics and set all new directors up for election in 2021. Much more than likely there will be three seats and adding two or 3 skilled directors from Starboard should really set the corporation in a very good place to hold management accountable through this critical time. Unquestionably Stephen Schulman, former CEO of Magellan Well being, and James Murray, a 28-year veteran of Humana, have extra than ample applicable experience.

The moment on the board, the chance is to assist management execute far more effectively by reducing shopper acquisition charges and focusing on good, long-time period consumers. This will guide to a significantly lessen churn fee, a extra sustained development and greater margins (currently eHealth is in the very low teenagers versus peers in the low 30s).

Ken Squire is the founder and president of 13D Observe, an institutional study services on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. eHealth is owned in the fund.