A successful value investor seeks activist strategy with ecommerce health insurance game

Scott Flanders, CEO of eHealth

Adam Jeffery | CNBC

Company: eHealth Inc. (EHTH)

eHealth provides private health insurance exchange services to individuals, families and small businesses in the United States and China. Its e-commerce platforms organize and present health insurance information in various formats that allow individuals, families and small businesses to research, analyze, compare and purchase a range of health insurance plans. The company’s Medicare-related health insurance plans include Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans; and ancillary products, including dental, vision and short-term and long-term disability insurance plans. It markets health insurance plans through its websites, such as eHealth.com, eHealthInsurance.com, eHealthMedicare.com, Medicare.com, PlanPrescriber.com, and GoMedigap.com, as well as through a network of marketing partners. The company also licenses its health insurance e-commerce technology that allows health insurance carriers, agents and brokers to market and distribute health insurance plans online; and provides sponsorship and online advertising services.

Stock market value: $ 1.67 billion ($ 64.25)

Activist: Hudson Executive Capital

Percentage of ownership: 5.80%

Average cost: $ 62.90

Activist Comment: Hudson Executive Capital (“HEC”) was launched in 2015 by Douglas Braunstein, formerly of JP Morgan, and Jim Woolery, formerly of Cadwalader, Wickersham & Taft, two unprecedented defense consultants activist investment activists. Their thesis at the time was to use their network of CEO partners to secure friendly commitments of $ 500 million to $ 15 billion of companies. They firmly stated that their strategy was to work constructively with companies on operations and strategy to help them maximize value for their shareholders and that Hudson will not execute a proxy fight. Since then, Woolery has left the company and they have threatened a proxy fight and filed a lawsuit against USA Technologies Inc. (USAT), before entering into a settlement agreement with the company, indicating that their ideological “activist model” is Broken. Hudson Executive had impressive 13D returns – 91.60% versus 24.87% for the S&P 500 over the same period. However, they have only taken seats twice before, one of which is still live and the other which was their worst 13D campaign. They certainly did well as value investors, but there is no evidence that they added value as activist investors or administrators.

What is going on:

On March 10, 2021, Hudson and the company entered into a cooperation agreement, under which John Hass, former CEO of Rosetta Stone, was appointed to the board as a Class I director with a term ending at the 2022 annual meeting and as a member of the board’s strategic committee. The company also agreed to engage in a process to mutually agree on a second director within the next 45 days. Hudson has agreed to abide by customary voting and suspension arrangements.

Behind the scenes:

Hudson filed a 13D on February 19, 2021, and in the last week he tabled an amendment in which he reported that they have agreed with the company for two seats on the board: a seat for John Hass, the former CEO of Rosetta Stone, and another place that will be chosen by Hudson and the company. This is the first Hudson board agreement in which they have not secured a position for a Hudson executive, indicating a potential lack of long-term commitment and focus. Despite this, they still signed a suspension agreement. Furthermore, they would clearly have preferred to have better access to the board as the suspension agreement explicitly states: “For the avoidance of doubt, the Parties acknowledge and agree that Hudson intends to continue to engage in non-public discussions with members of the Company’s management and advice. . . “

Another part of the deal that is worth noting is the reimbursement of expenses. While reimbursement of expenses is standard in activists’ settlement agreements, Hudson has a questionable past with such reimbursements. On April 26, 2020, Hudson resolved its proxy fight with USA Technologies (USAT) for a majority of the board. On June 29, 2020, the new USAT Board of Directors unanimously approved the issuance of $ 4.5 million of restricted shares to Hudson Executive for the reimbursement of third party costs and expenses incurred by Hudson Executive in connection with the his request for proxy. In our view this was unusual and glaring for two main reasons: (i) the company’s entire market capitalization was only $ 354 million and (ii) just three weeks prior to the transaction Hudson estimated in a SEC statement that their total expenses were approximately $ 1 million.

In this situation, the settlement agreement stipulates that Hudson will be reimbursed for his “reasonable and documented out-of-pocket expenses and commissions” but does not provide an estimate of how these expenses are as we see in other settlement arrangements. They do not disclose it despite knowing what the number is, as the agreement specifically specifies that the reimbursement of expenses must not “exceed the overall amount previously agreed by the Parties”. Activist directors generally urge the company to err on the side of excessive transparency and disclosure. Hudson does not seem to share this philosophy, at least when it comes to reimbursing his expenses.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.