Company: Appian Corp. (APPN)
Business: Appian provides business process management (BPM) solutions. Its products include BPM software, case management, mobile application development and platform-as-a-service. The company was founded by Matthew Calkins, Robert Kramer, Marc Wilson and Michael Beckley in 1999 and is headquartered in McLean, Va.
Stock Market Value: $1.86B ($25.21 per share)
Activist: Fivespan Partners
Ownership: 7.91%
Average Cost: $29.73
Activist Commentary: Fivespan Partners, LP is a San Francisco-based investment firm founded in October 2023 by Dylan Haggart and Sarah Coyne. Prior to Fivespan, Haggart and Coyne were partners at ValueAct Capital and 80% of the investment team is from ValueAct. Fivespan, named after the unique five-stone arched bridge in Haggart’s hometown, views itself as a bridge between the market and companies. The firm prefers “behind the scenes,” collaborative and amicable activism, but it would resort to a proxy fight if there were no other choice. We expect that Fivespan will look for board seats in situations where it believes it could add real value, but we do not expect the firm to pursue board representation as often as ValueAct does (i.e, in roughly 50% of core portfolio positions). Haggart has experience as a public company director. He served as a director of Seagate (2018-present) and Fiserv (2022-2024), where he delivered stellar returns over his tenures of 205.25% and 64.68%, respectively, versus 46.12% and 4.98% for the Russell 2000. Fivespan looks for high quality, idiosyncratic businesses with good, strategic assets. The firm does not advocate for selling its portfolio companies as a primary activist strategy, but it likes companies that people want to own. Accordingly, many of its activist campaigns could end with a sale of the company, providing two paths to shareholder value. The fund is a drawdown structure that holds investments for at least three to five years, aims to have six to eight investments at a time and averages $100 million to $300 million in each investment.
What’s happening
On Jan. 27, Fivespan announced that it will continue meeting with management regarding the company’s operations, strategy and governance, including whether it makes sense for a Fivespan employee to join the company’s board.
Behind the scenes
Appian provides mission critical business process and management software solutions to some of the largest, most complex enterprises in the world. Its customer base consists primarily of legacy businesses that operate outdated backend technology stacks, including large banks, telecom companies and even the Department of Defense. Appian’s software is deeply embedded into these companies’ systems, resulting in extremely high switching costs. As a result, customers hardly ever leave, with gross retention at approximately 99%. Moreover, Appian and its peers have penetrated only about 10% of what could be a $90 billion market. As a result, the company benefits from consistent mid-teens revenue growth, mostly from new business with current clients. Despite this compelling backdrop, Appian shares trade at roughly 2-times sales and 3-times gross profit – more than a 50% discount to similarly situated peers.
With Appian’s stock down 89% over the past five years, Fivespan Partners has entered the picture filing a 13D disclosing a 6.16% position in Appian and announced that it will continue to have meetings with management regarding the company’s operations, strategy and governance, including whether it makes sense for a Fivespan employee to join the company’s board. Any changes made or board representation would have to come at the invitation of the current board as Appian is effectively a controlled company. Appian co-founder CEO, chairman, and president Matthew Calkins controls about 39% of the voting power, two of the other three founders are on the nine-person board with many other directors being former employees of Appian or having relationships with Calkins. But that is OK. Going back to his ValueAct days, Dylan Haggart has had a lot of experience and success working with controlled companies like KKR and The New York Times, the latter of which is also a current Fivespan portfolio position.
There are at least three solvable issues that have driven Appian’s discount. First is that the market has a fundamental misconception around Appian’s artificial intelligence risk. As is the problem with many software companies, Appian has been broadly categorized as an “automation” company, leading it to be lumped in with businesses genuinely exposed to AI disruption, such as customer service or chatbot-driven automation. Appian’s automation, however, is entirely different, as it is focused on creating and implementing complex backend processes. Nevertheless, this branding has forced it to be painted with the same brush, and in today’s market, anything associated with automation is being sold off indiscriminately. Anyone who looks at Appian’s financials’ can recognize the fallacy of this bear case, as the company’s growth and retention metrics look nothing like those of companies with actual AI risk. The problem here is that Appian has thus far failed to communicate this to the market. The company’s four founders – Matthew Calkins, Michael Beckley, Robert Kramer, Marc Wilson – are tech guys, mostly college buddies who started this company out of a garage. These are not guys who want to talk to the market, and the company’s lack of an investor relations professional further underscores that. Thus, communicating this narrative to the market and perhaps even finding someone to fill this role for the company are both areas where Fivespan could add immediate value.
Second is a lack of focus on margins. Historically, management, like many other growth companies, has prioritized top-line growth with limited attention to the company’s profitability, leaving Appian’s free cash flow margins in the low single digits, while comparable businesses like Pega generate margins north of 30%. With Fivespan now involved, this is likely to begin to change. Appian’s recurring and sticky revenue model should allow them to pursue both revenue growth while expanding margins, by ensuring that incremental growth generates incremental profitability. While margins won’t jump overnight, they should improve steadily each quarter as costs continue to grow more slowly than revenue, something we have observed from larger peers like Pega and ServiceNow. It is important to note that this is not a situation where layoffs and cost-cutting will lead to margin improvement, just being conscious of incremental costs as revenue increases should significantly benefit the bottom line.
Lastly is capital allocation. As margins expand, Appian should become a cash cow, making disciplined capital allocation increasingly important for a company that hasn’t had the strongest track record of doing so. This is where we see Haggart adding the most value. Some of the best activism occurs when a good activist gets on the board of a good company and management continues to do what they do best – run the business generating significant free cash flow, and an activist like Haggart does what he does best – help advise the board the best way to spend the cash flow to maximize shareholder value. This is one thing ValueAct is known for and that Haggart did extremely well at companies like Seagate. And this is an even more important skill to have on Appian’s board, as the company is on the verge of coming into an at least $500 million windfall from a corporate espionage lawsuit filed against Pega. Appian sued Pega in 2020 and won a $2.036 billion verdict in 2022. The Virginia Court of Appeals overturned the verdict in 2024 and remanded it back to the lower court for a new trial. However, Appian had partly insured the verdict in the amount of $500 million, meaning that if it’s ultimately awarded less than $500 million, the insurance company will make up the difference. If it’s awarded more than $500 million, it is theirs to keep and the insurance company is off the hook. So, it is just a matter of time before Appian receives at least $500 million, which is more than 25% of the company’s entire market cap.
In the firm’s other three campaigns, Fivespan has demonstrated that it prefers “behind the scenes,” collaborative and amicable activism — and that’s a good thing as it doesn’t have any other choice here. However, while any strategic, operational, or governance changes are ultimately in the company’s discretion, we think Appian and Fivespan are rowing in the same direction. Moreover, we think the company would benefit greatly from the addition of a minority shareholder representative on the board, like Haggart or another Fivespan executive. One of the benefits of having a hedge fund representative on the board is that the board not only gets the director’s advice and counsel, but the resources of the entire firm and its team of analysts. This is particularly important when there are crucial capital allocation decisions to be made. Ultimately, this will be an activist-lite campaign and Haggart knows that he can only be effective here with the blessing and invitation of the founder. We expect he will proceed with that in mind.
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 investments.
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