Cognizant is one of the few companies seeing a second round of shareholder activism in less than 10 years. Mantle Ridge LP raised its stakes in Cognizant to more than $1 billion, according to the Wall Street Journal.
Mantle Ridge has not disclosed its stake in the IT services provider. Considering it started buying in the second half of 2022, Cognizant’s average share price between 1 July 2022 and 7 March 2025 was $79. At this price, the activist shareholder would hold at least 2%, according to Mint‘s calculations. Cognizant shares closed at $83.23 on 7 March.
Mantle Ridge sees Cognizant shares as undervalued and believes the company has more room to grow, WSJ reported citing unnamed people.
Activist shareholders buy a substantial stake in a company to drive desired change, typically by getting a seat on the board of directors and voting for or against specific corporate actions.
“Activist shareholder firms need not always take a board seat. They can reach out to other shareholders and use that clout in the AGM to necessitate changes in the company, including cost-cutting, shutting down parts of the business or, in extreme cases, seeking a change in management,” said Pramod Gubbi, co-founder of Marcellus Investment Managers, a Mumbai-based investment management firm.
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Such shareholder activism is on the rise. Globally, 243 activist campaigns were launched in 2024, the highest since 2018, according to a 29 January Barclays report.
This is also not Mantle Ridge’s first outing.
The activist shareholder set its sights on Air Products and Chemicals Inc., a Pennsylvania-based industrial gases provider, in October last year. Mantle Ridge announced more than a $1 billion stake in the gas provider and sought three changes, including a clear succession plan for the chief executive role, changes in the capital allocation policy, and a pullback from risky projects.
Mantle Ridge, led by American businessman and founder Paul Hilal, has $4.6 billion in assets under management, roughly the size of LTIMindtree Ltd, India’s sixth largest software service exporter.
For Cognizant, such shareholder activism is also not new.
Elliott Investment Corp, one of the world’s largest activist shareholders, came to Cognizant nine years ago, by the end of 2016.
Elliott’s involvement resulted in a public standoff as it wrote an open letter to Cognizant’s management and board in November 2016, asking for greater returns for shareholders and not chasing growth at all costs.
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“Cognizant’s operations and capital allocation strategies are remnants of its history as a nascent industry “challenger” that invested at all costs to gain share. Today, however, Cognizant has evolved into a scale industry leader, and its business choices must also evolve to reflect this reality,” read Elliott’s letter dated 28 November 2016.
For now, Mantle Ridge’s activism is not playing out in the public, suggesting that this round could be pretty mild, according to an investor.
However, nine years ago, Cognizant agreed to Elliott’s demand and set a target of increasing operating margin by 250 basis points in three years. At least one analyst had flagged it as a concern.
“We are now concerned that this may be a side-effect of the onus on margin expansion,” wrote HSBC analysts Yogesh Aggarwal, Vikas Ahuja, and Vivek Gedda in a note dated 17 May 2018. “In 2017, CTSH, in its attempt to squeeze more profits (to achieve its margin targets), limited wage hikes and rationalized the workforce. We believe this has now started to manifest in higher attrition. On top of this, attrition of local employees in the US remains relatively high and, in light of the higher visa rejection rate, operational management will remain a challenge for the company.”
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Cognizant, which ended 2016 with an operating margin of 17%, saw it decline to 14.6% by the end of 2019.
Still, when Elliott entered the picture in 2016, the company was doing well. It was then the fastest growing IT services provider among peers Tata Consultancy Services Ltd and Infosys Ltd. Cognizant ended 2017 with a yearly revenue growth of 9% as against TCS’ and Infosys’ 6.7% and 5.8%, respectively.
With Mantle Ridge’s entry, the company is nowhere near the smooth sailing it found itself doing in 2016.
Ravi Kumar, since taking over as chief executive of Cognizant in January 2023, has been trying to turn its fortunes around. Cognizant’s full-year revenue declined in 2023 but rose 1.98% to $19.74 billion in 2024.
Most of this growth, however, came on the back of acquisitions.
Cognizant noted in its fourth-quarter earnings that its recently completed acquisitions of Belcan and Thirdera made up 200 basis points, or 2 percentage points, of its 2024 revenue growth. This implies the company’s business, adjusted for its acquisitions, declined last year.
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Cognizant acquired Belcan in September 2024 for $1.3 billion to strengthen its position in the engineering research and development (ER&D) sector. In January of the same year, it acquired Thirdera for $430 million to build an artificial intelligence offering.
Between 1 July 2022 and 7 March 2025, Cognizant’s shares jumped 11%, while those of TCS, Infosys, HCL Technologies Ltd and Tech Mahindra Ltd rose 11%, 16%, 61%, and 49%, respectively. Wipro Ltd’s shares fell 31% during the period. While Cognizant is listed on Nasdaq, homegrown IT services companies are listed on Indian stock exchanges.
At present, Cognizant’s stock is the most undervalued among peers as it trades at 18.5 times its earnings, the least among the country’s top five software service providers. TCS, Infosys, HCLTech, Wipro, and Tech Mahindra trade at 26.7 times, 25.3 times, 24.8 times, 24.4 times, and 35.33 times their earnings, respectively.
Cognizant’s operating margin has also been slightly lower than in 2022, when Mantle Ridge started showing interest in its shares. The company reported an operating margin of 15.3% at the end of 2022 and 14.9% last year. In contrast, TCS, Infosys, HCLTech, Wipro, and Tech Mahindra reported operating margins of 24.6%, 20.7%, 18.2%, 16.1%, and 6.1%, respectively, at the end of the 12 months through March 2024.
Cognizant has spent more than $2 billion on acquisitions in the last two years, while it handed out $1.2 billion in dividends and $1.7 billion in share repurchases during the period.
Also read | Cognizant’s ambitious acquisition of Belcan raises questions
Gen AI, which gained steam following the launch of ChatGPT in November 2022, is expected to compound challenges as it threatens to eat up parts of the work done by software services companies, according to analysts and industry executives. Kumar faces another challenge of keeping shareholders happy even as its board undergoes a churn.
By the end of 2016, when Elliott got involved in Cognizant’s functioning, the company had five current and former chief executives on its 13-member board. In the last three years, Cognizant has witnessed at least a dozen board changes, with not a single chief executive on it barring Ravi Kumar.
Mint could not independently ascertain whether the board was refreshed on account of Cognizant’s discussions with activist shareholders.
Cognizant, however, welcomed the changes.
“We welcome input from our shareholders. Members of our management team and Board have been constructively engaging with Mantle Ridge since mid-2024, and Mantle Ridge has communicated support for our management and Board on multiple occasions,” said Cognizant in an emailed response to Mint’s queries on Sunday. “We are focused on executing our strategy and creating value for all shareholders.”
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Soon after he took over, Kumar had outlined a policy of working with 40% less office space to boost the company’s operating margin. “We expect the structural shift in our real estate costs to help eliminate 80,000 seats and 11 million sq. ft in large cities in India,” Kumar told analysts in a post-earnings call on 3 May 2023.
However, it is not clear if Cognizant’s strategy of improving margins was based on the feedback received from the activist shareholder.
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