Convergys Corp., one of Cincinnati’s largest headquarters companies, could be in play. A Wall Street mergers and acquisitions tracker DealReporter, quoting three unnamed sources, this week said Convergys has hired investment bank JP Morgan to explore a possible sale. Convergys officials would not comment on the report.
But investment analysts who cover the company point to signs that indicate the $2 billion downtown-based company that employs 70,000 around the world could be broken up.
Sale of all or part of the company could put the future of 2,200 Convergys employees in the region in question. It could also cast doubt on the future of the downtown headquarters, which the city of Cincinnati agreed to save from moving in 2003 with a tax break valued at $52 million.
“It is plausible” that Convergys could be sold, said Matthew McCormack, an analyst who follows the company for Arlington, Va.-based BGB Securities.
The recent turmoil at the top and the ascension of Jeff Fox to the CEO’s office has intensified talk of a possible sale. Fox, appointed in February after CEO David Dougherty was fired, is closely aligned with Convergys’ largest shareholder, a New York-based hedge fund called Jana Partners. The fund is known as an “activist shareholder,” an investor with a history of buying into companies and then pushing management to sell all or parts of it if their stocks are underperforming.
“They’re a shareholder with a history in the industry of monetizing their investments,” McCormack said.
“It doesn’t surprise me that Jana is trying to get them sold,” said Scott Sutherland, who follows Convergys for San Francisco-based Wedbush Securities.
That’s what Jana did with a Convergys competitor, Sitel Corp., in 2006. Like Convergys, Sitel operates call centers around the world, handling customer contacts for other companies. Jana bought up enough shares to become the largest shareholder, and the company was sold in a $450 million deal.
In February 2009, Jana sought and won two seats on the board of Convergys. One was filled by its managing partner, Barry Rosenstein, the other by Fox. A year later, Dougherty was removed as CEO and Fox was named to replace him.
The rapid ascension of Fox, who was hand-picked by Jana to be on the board, to the corner office “sent a clear message to potential strategic and financial buyers that no idea is off the table,” McCormack said.
Fox did not comment for this story but in an earnings conference call Tuesday, he said he’s focused on improving the business, serving customers and reducing costs. “I continue to be encouraged by the long-term opportunity,” he said.
Fox said he’s spending a lot of time with customers and looking for ways to simplify the business. Speaking of the telecommunications sector, one of Convergys’ major clients, he said, “Long-term, this is a business we can grow.”
If Convergys is shopped, one buyer is unlikely to buy it all because its businesses are too diverse, McCormack said. Rather, it’s more likely the company would be sold in parts “to unlock shareholder value,” McCormack said.
Parts of Convergys have been up for sale before. One of Fox’s first moves as CEO was to sell, for $100 million, the division that provides human resources management for other companies. About 100 people work for that business in Cincinnati and 2,300 worldwide.
In 2008, Convergys put another division up for sale. That unit, information management, which handles billing for telecommunications companies and others, didn’t attract any buyers and the stock market’s decline caused the company to pull it back.
Analysts say the information management business could be tough to sell, but may attract a private equity investment firm.
In February, in a conference call announcing Fox’s appointment, Chairman Philip Odeen said the information management business was “part of Convergys’ future and part of our success in building this business.”
At least one analyst says the company needs to boost revenue and gain more business to be attractive to any potential buyers. “Breaking it apart at this stage, it’s hard to argue you could get much incremental value,” said T.C. Robillard of Baltimore-based Signal Hill Capital.
Convergys shares have been rising steadily since hitting a low of $4.06 in November 2008 in the midst of the financial meltdown. Shares closed Friday at $12.64, still far below the all-time high of $55.12 reached in July 2000.
Convergys’ most valuable asset is its main line of business, its call centers and customer management business. That business could be attractive to several buyers, McCormack said. Tops among them is Grupo Atento, a call center company based in Spain that has a small presence in the U.S. Another possible suitor is Teleperformance, a Paris-based call center company that is the largest player in the industry.
Fox’s short-term arrangement as CEO is another factor pointing to a possible sale. His contract is only for one year, and his pay is heavily weighted in company stock. He has not moved his family to Cincinnati, and his contract allows for frequent use of the company plane to shuttle back and forth to their home in Arkansas.
His contract could be renewed after a year and Odeen told investors in February, “Hopefully, Jeff will agree to stay on for much longer time.”
After Jana Partners, the largest Convergys shareholder is downtown Cincinnati-based Fort Washington Investment Advisors, which is owned by Western & Southern Financial Group. Western & Southern is the third largest shareholder.
Western & Southern CEO John Barrett serves on the Convergys board, as does Kroger CEO David Dillon. Through spokespeople, both declined to comment on Convergys.