Virtusa In Need of Board Revamp, New Mountain Says

(Bloomberg) -- One of the largest investors in Virtusa Corp. says the information-technology company is turning in a lackluster performance that justifies its push for new board members.

New Mountain Vantage Advisers LLC, which holds about an 11% economic stake, sent a letter to Virtusa’s board outlining its concerns about the company’s failure to reach stated goals such as diversifying revenue and improving margins. New Mountain says those shortcomings have been coupled with poor corporate governance and management compensation arrangements that are out of line with peers.

“We believe Virtusa is an amazing company with great potential and we plan to be significant investors for a long time,” New Mountain said in the letter dated June 17, a copy of which was reviewed by Bloomberg News. “It is clear, however, that there has been significant underperformance, accompanied by a lack of accountability and flawed governance.”

New Mountain Vantage Advisers is the public equity arm of the private equity firm New Mountain Capital LLC.

New Mountain argues in the letter that Virtusa’s margins are 50% below its IT services peer average despite repeated promises to improve them. Shares in the Southborough, Massachusetts-based company have fallen about 27% over the past 12 months, giving it a market value of about $965 million, according to data compiled by Bloomberg.

A representative for Virtusa wasn’t immediately available for comment.

Critical of Deal

New Mountain also criticized Virtusa’s 2016 purchase of Polaris Consulting & Services Ltd., which it argued in the letter resulted in the degradation of Virtusa’s earnings growth trajectory, key performance indicators and earnings multiple. The investor noted that the company’s executive compensation has traditionally been tied to revenue growth and adjusted operating income metrics, which were aided by the deal.

The company could be worth $1 billion more than it is today had it focused on organic growth and smaller tuck-in acquisitions rather than a “bet-the-company deal to buy Polaris in the quest for additional scale.”

“In the end, the only financial metrics that went materially higher post the Polaris deal were Virtusa’s revenues and management’s compensation,” it said.

Board Proposals

New Mountain had proposed to the company’s leadership that Chad Fauser, New Mountain’s head of engagement and a former partner at Nelson Peltz’s Trian Fund Management, and Prasad Chintamaneni, an IT services veteran and managing director at the firm, be appointed to the board. That didn’t happen, although New Mountain said some of the ideas it presented to the company had been incorporated in its new “Three Pillar Strategy.”

New Mountain said it decided to formally nominate Michael Baresich, Chintamaneni and IT executive Patricia Morrison to the board Monday after being surprised Friday, when Virtusa appointed Abidali Neemuchwala to the board and expanded the panel to 10 members from nine.

Virtusa said in a statement Friday that it had dedicated a great amount of time to working constructively with New Mountain in recent months.

“The Virtusa board of directors is open to new ideas to create value for all shareholders and has welcomed the input from NMV. As part of our ongoing process to identify and appoint an additional independent director, the board welcomes the opportunity to interview the additional candidates NMV provided in its notice of nominations,” it said.

New Mountain said it remains open to discussing further board refreshment and proposed that either Fauser or Chintamaneni be appointed to the board along with two new mutually agreed upon directors, one sourced by New Mountain and one sourced by Virtusa. New Mountain said it also wants to see a business optimization committee or task force created or the expansion of the board’s finance committee to develop a detailed plan to improve margins and diversify revenue.

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