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Company: eHealth Inc. (EHTH)
Business: eHealth is a health insurance marketplace with a technology and service platform that provides solutions for customer loyalty, education and health insurance registration. Their mission is to connect everyone with the highest quality, most affordable health insurance and Medicare plans for their circumstances. The company operates in two segments: (i) Medicare and (ii) Private, Family and Small Business. The Medicare segment makes up most of the business and accounted for ~ 89% of sales in 2020. EHealth generates much of its revenue from commission payments from health insurance companies related to plans purchased by members who have used their services.
Market value: $ 1.8 billion ($ 70.04 per share)
Percentage ownership: 7.00%
Average cost: $ 56.16
Activist Comment: Starboard is a very successful activist investor and has extensive operational experience helping boards and management teams run businesses more efficiently and improve margins. This is her 101st 13D filing. In those 101 submissions, they achieved an average return of 28.88% versus 11.93% for the S&P500. Their average 13D hold time is 18.1 months.
On March 11, 2021, Starboard sent the Company a letter proposing the following four candidates for election to the Company’s Board of Directors at the 2021 Annual Meeting: (i) Peter A. Feld, Executive Member and Head of Research, Starboard Value; (ii) James E. Murray, President and Chief Operating Officer of Magellan Health, Inc. and former CEO of Humana, Inc .; (iii) Erin L. Russell, a professional director serving as a director of Kadant Inc. and Tivity Health Inc.; and (iv) Steven J. Shulman, former director of HealthMarkets, Inc., a competitor to eHealth and former chairman and CEO of Magellan Health Inc. Starboard, also stated that he has had discussions with management and will continue to do so and the Board of Directors on various items including the latest financial, financial and operating results and the composition of the Board of Directors, among others.
Behind the scenes:
Starboard has looked at the company for a while but has acquired all of its stake in the past 60 days. They bought their shares at an average cost of $ 56.16 (the company was trading at $ 151.66 on March 31, 2020) and acquired their shares after the company’s share price fell after news of a questionable financing deal with HIG Capital.
eHealth has several significant tailwinds, such as the baby boomers aging in Medicare, via indexing on Medicare Advantage – the largest division of eHealth – and increasing online penetration in middle age as the quarantine of Covid reduces the use of physical agents and more Got customers to sign up digitally. The company did not take advantage of this tailwind. Scott Flanders, CEO of eHealth, made a huge mistake in 2019 by growing sales at all costs, including high acquisition costs and short-term customers, resulting in very high churn, low margins and slow growth compared to peers who recently grew by 100% year. Flanders asked the board for a second chance to get it right and they’re getting one.
Up until a week ago, the board consisted of seven directors, the majority of whom have been on the board for over 12 years and very few of whom have relevant industry experience. Then, last week, Hudson Executive Capital wrapped up its proxy battle with the company by appointing John Hass, former CEO of Rosetta Stone, to its board of directors. That doesn’t make sense in any language. The company needs a qualified, experienced board who can help Flanders but also hold them accountable when unsuccessful.
This is where Starboard’s nominees are an integral part. With the recent addition of a ninth director due to a misdirected issuance of preferred stock and a second new director named at the next annual Hudson Settlement meeting, the company will have three new directors on its ten-person board.
Starboard nominated four directors, although only three seats will likely be available this year.
Over-nomination of directors is something Starboard often does to give them flexibility in the event seats are added, or if, in that case, the company chooses to adhere to good corporate governance practices and all new directors for election in 2021 deliver. More than likely there will be three seats, and two or three veteran Starboard directors should put the company in a good position to hold management accountable at this crucial time. Stephen Schulman, former CEO of Magellan Health, and James Murray, a 28-year veteran of Humana, certainly have more than enough relevant experience.
Once on the board, the option is to help management run more efficiently by reducing customer acquisition costs and focusing on good, long-term customers. This will result in much lower churn rate, more sustainable growth, and better margins (currently, eHealth is in their lower teens compared to their peers in their low 30s).
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. eHealth is fund-owned.