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Business: eHealth is a health insurance marketplace with a technology and service platform that provides consumer engagement, education and health insurance enrollment solutions. Their mission is to connect every person with the highest quality, most affordable health insurance and Medicare plans for their life circumstance. The company operates in two segments: (i) Medicare and (ii) Individual, Family and Small Business. The Medicare segment represents most of the business and constituted ~89% of revenue in 2020. eHealth derives much of its revenues from commission payments paid by health insurance carriers related to plans that have been purchased by members who used their services.
Stock Market Value: $1.8B ($70.04 per share)
Percentage Ownership: 7.00%
Average Cost: $56.16
Activist Commentary: Starboard is a very successful activist investor and has extensive operational activism experience helping boards and management teams run companies more efficiently and improving margins. This is their 101st 13D filing. In those 101 filings, they have averaged a 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 a letter to the company nominating the following four director candidates for election to the company’s board at the 2021 Annual Meeting: (i) Peter A. Feld, managing member and head of research of Starboard Value; (ii) James E. Murray, president and chief operating officer of Magellan Health, Inc. and former executive at Humana, Inc.; (iii) Erin L. Russell, a professional board member who serves as a board member at 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 it has engaged, and intends to continue to engage, in discussions with management and the board regarding various items including the recent financing, financial and operating results, and the composition of the board, among other topics.
Starboard has been looking at the company for a while, but acquired its entire stake in the last 60 days. They bought their stake with an average cost of $56.16 (the company was trading at $151.66 on March 31, 2020), acquiring their shares after the company’s share price plummeted following the news of a questionable financing transaction with H.I.G. Capital.
eHealth has several significant tailwinds such as the baby boomers aging into Medicare, over indexing to Medicare Advantage – eHealth’s largest business line, and penetration online growing in the mid-teens as Covid quarantining has lessened the use of physical agents and have more clients signing on digitally. However, the company has not been capitalizing on these tailwinds. Scott Flanders, eHealth CEO, made a major blunder in 2019 by growing revenue at any cost, including high acquisition costs and short-term clients, leading to a very high churn, low margins and slow growth compared to peers who grew at 100% last year. Flanders has asked the board for a second chance to get it right, and he is getting one.
Until a week ago, the board has consisted of seven directors, a 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 settled its proxy fight with the company by naming John Hass, former CEO of Rosetta Stone, to the board. That does not make sense in any language. The company needs a qualified, experienced board that can help Flanders, but also holds him accountable if he is unsuccessful.
That is where Starboard’s nominees are integral. With the recent addition of a ninth director pursuant to a misguided preferred stock issuance and a second new director named at the next annual meeting pursuant to the Hudson settlement, the company will have three new directors on its ten-person board.
Starboard nominated four directors, although only three seats will likely be up this year.
Over-nominating directors is something that Starboard often does to give them flexibility in case seats are added or if, in this case, the company decides to abide by good corporate governance practices and put all new directors up for election in 2021. More than likely there will be three seats and adding two or three experienced directors from Starboard should put the company in a good position to hold management accountable during this crucial time. Certainly Stephen Schulman, former CEO of Magellan Health, and James Murray, a 28-year veteran of Humana, have more than enough relevant experience.
Once on the board, the opportunity is to help management execute more efficiently by lowering customer acquisition costs and focusing on good, long-term customers. This will lead to a much lower churn rate, a more sustained growth and better margins (currently eHealth is in the low teens versus peers in the low 30s).
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 activist 13D investments. eHealth is owned in the fund.
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