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Activist hedge fund Starboard Value has taken a significant stake in software maker Autodesk (Nasdaq: ADSK) amid concerns over the company’s handling of a recent accounting scandal. The firm, led by Jeff Smith, invested approximately $500 million in Autodesk and is considering legal action to address issues related to corporate governance and financial disclosures.

Starboard Takes Action, Weighs Legal Option

Starboard Value’s investment in Autodesk comes because the activist fund believes the company should improve its margins and change its board.

The firm recently met with Autodesk executives to discuss concerns related to operations, corporate governance, and the company’s response to an internal accounting probe. Starboard is weighing legal options to reopen Autodesk’s director nomination window and postpone the annual shareholder meeting scheduled for July 16.

Autodesk’s Accounting Malpractice Scandal

In April 2024, Autodesk disclosed that it had initiated an internal investigation in March regarding disclosure issues surrounding its free cash flow metrics and operating margins.

The probe revealed that executives, including the CFO, had manipulated reporting related to the company’s contract billing structure as Autodesk transitioned from annualized payments to upfront payments. This manipulation was intended to inflate the company’s free cash flow and operating margin numbers, which were used to determine executive compensation and gauge the company’s performance.

As a result of the investigation, Autodesk’s then-CFO, Deborah Clifford, was removed from her position and reassigned to a different executive role. The company is currently facing inquiries from the Justice Department and the Securities and Exchange Commission (SEC) concerning this matter.

Starboard criticized Autodesk for failing to disclose the investigation and other material updates until after the March deadline for shareholders to nominate director candidates, just before the stock price dropped by 20%.

The activist fund believes that this delay in disclosure may have hindered shareholders’ ability to make informed decisions regarding their investments and governance rights.

Autodesk (ADSK) Stock Gains in Premarket

As of June 14, 2024, at 6:02 AM EDT in pre-market trading, Autodesk’s stock price was $234.90, representing a 4% increase from the previous close of $225.87.

The company’s market capitalization was $48.68 billion, with a trailing P/E ratio of 49.10 and a forward P/E ratio of 27.93. The stock’s 52-week range was $163.20 – $335.48, and its price-to-sales ratio (TTM) was 8.65. Analysts’ consensus price targets for Autodesk ranged from $225.00 to $310.00.

Autodesk’s stock has underperformed the broader market over the past year, with a 1-year return of 5.90% compared to the S&P 500‘s 24.32% return. The company’s year-to-date return of -7.23% also lagged behind the S&P 500’s 13.87% YTD return.

This underperformance can likely be attributed to the recent accounting malpractice scandal. While valuation metrics such as P/E and P/S ratios suggest that Autodesk’s stock may be overvalued compared to its peers, analyst price targets indicate potential upside for investors.

The stock’s 4% increase in pre-market trading on June 14, 2024, follows the news of Starboard Value’s significant stake in the company.

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