ROVI CORPORATION
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(Name of Registrant as Specified in Its Charter)
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ENGAGED CAPITAL MASTER FEEDER I, LP
ENGAGED CAPITAL MASTER FEEDER II, LP
ENGAGED CAPITAL I, LP
ENGAGED CAPITAL I OFFSHORE, LTD.
ENGAGED CAPITAL II, LP
ENGAGED CAPITAL II OFFSHORE LTD.
ENGAGED CAPITAL, LLC
ENGAGED CAPITAL HOLDINGS, LLC
GLENN W. WELLING
DAVID LOCKWOOD
RAGHAVENDRA RAU
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(Name of Persons(s) Filing Proxy Statement, if Other Than the Registrant)
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(3)
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
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Rovi Board is long-tenured, entrenched, not-aligned with shareholders, and refuses to take responsibility for failed strategies they put in place
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Engaged Capital is seeking minority representation to bring much needed skills and a fresh, shareholder-focused perspective to the Board
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Vote the WHITE Proxy Card to significantly improve Rovi’s Board and enhance the value of your investment in Rovi
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Board claims
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Our response
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“Don’t let Engaged Capital dismantle a strategy that is clearly working.”
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Clearly the market disagrees that the Board’s strategy is working. Stock performance seems to indicate there is little faith in the success of the transformation, at least as overseen by the current group of directors.
Also, if the strategy is clearly working, then why does the Board project no real product growth until 2017?
And why are the current directors selling shares rather than investing in the Company’s stock if Rovi’s future is so bright?
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“Over the past three years, Rovi has generated over $100 million in cost-savings”
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If Rovi has in fact taken $102 million of costs out of the business, it is not apparent by evaluating its cost structure or operating results.
Operating expenses at Rovi have actually increased from 2011 as any cost savings have been plowed back into growth initiatives that have yet to bear fruit.
Shareholders have not seen a dime of benefit from these claimed cost savings in the form of improved earnings or cash flows.
Regardless, Rovi’s cost structure remains excessive with three corporate headquarters and over $50 million in corporate SG&A expenses alone, which represents approximately 10% of the Company’s revenue.
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“[Rovi is] realizing steady annual improvement in Total Stockholder Return (TSR).”
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TSRs have been very poor over ANY reasonable time period.
Rovi has produced NEGATIVE returns for shareholders for the past 1-, 3-, and 5-year periods and since the Macrovision merger with Gemstar in 2008.
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“Engaged Capital would use its position on the Board to dismantle Rovi’s current strategy by drastically cutting product investment.”
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We have NOT stated any intention of “dismantling” the current strategy and we have NOT advocated drastic cuts to spending.
Further, we are seeking the election of directors that will constitute a minority of the Board and our nominees, if elected, will work with their fellow directors to put Rovi on a path towards value creation.
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“Our Board augmentation process began well before Engaged Capital made any demands regarding new directors. In March 2014, as a result of an intense period of restructuring, realignment and deep strategic review that took place well before Engaged Capital’s campaign, Rovi’s Board decided to augment the Board with key expertise in core strategic areas.”
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The Company’s own proxy statement states that “In the third and fourth quarters of 2014, the Board of Directors began discussions about augmenting the Board of Directors with new members and began the process of determining the qualifications and skills desired for such new members …In December 2014, the company engaged an independent search firm to assist the company in its search for new directors.”
Engaged Capital had been in discussions with the Board regarding the Board’s composition since March 2014, well before the Board took any actions to seek augmentation of the Board.
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“The Board looked at Engaged Capital’s Board nominees to see if any could fill this requirement. In our opinion, none rose to the level of candidates the Board is currently evaluating.”
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In October 2014, in a phone call with Mr. Welling, Rovi’s CEO indicated that he was impressed with Mr. Lockwood and that he intended to recommend that Mr. Lockwood be included in the Company’s nominee evaluation process. In December 2014, Rovi’s CEO confirmed he knew Mr. Rau and thought very highly of him.
The rest of the Board never interviewed any of Engaged Capital’s nominees and it is unclear on what basis they now claim to have concluded that the nominees did not rise to the level of the candidates they were evaluating.
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“Despite the numerous times Rovi tried to include Engaged Capital in its process to add new members to its Board, Engaged Capital refused to participate in a constructive manner.”
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Engaged Capital began conversations with the Board regarding the need to add new directors in March 2014, was prepared to nominate directors in October 2014, and did eventually nominate directors in December 2014. Engaged Capital only publicly disclosed its nomination in March 2015, clear evidence of our desire and intent to constructively resolve this situation and avoid a proxy contest.
Engaged Capital sought a constructive solution with the Board over the course of many months. We introduced a number of potential candidates to the Board. Through this months-long process the Board offered only once, a few days before filing its definitive proxy statement in April 2015, to add one Engaged Capital nominee to the Board and refused to take the steps to form a new Strategy and Finance Committee (or reform the current one) along the lines Engaged Capital believed necessary to serve the best interests of shareholders.
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“Still, in order to avoid a costly proxy fight, Rovi recently made a reasonable, good-faith effort to reach a settlement with Engaged Capital. On April 8, 2015, Rovi’s Board proposed a resolution that would further augment its Board with two new directors – one of Engaged Capital’s nominees and another director to be mutually agreed upon. In addition, as part of Rovi’s offer, a director endorsed by Engaged Capital would join the Board’s existing Strategy Committee and the Company would create a Finance Committee that would be comprised of a majority of new directors and chaired by Engaged Capital’s nominee. One day later, Engaged Capital rejected Rovi’s offer.”
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The Board’s offer was actually a counter-offer to OUR proposal of a mutually agreeable resolution on Board composition, except that it came far short of what we considered to be best for shareholders.
The “mutually agreed upon independent” candidate proposed by the Board is the lead director of a public company of which one of Rovi’s current directors is CEO. It is clear to us that the independent candidate was not really independent.
The proposed Strategy and Finance Committee had to run through the CEO or Chairman rather than be independent as we thought was critical for its proper functioning.
The Board’s 11th hour “deal” would have also barred Engaged Capital from owning more than 1% of the Company’s stock. This is an unprecedented restriction of shareholder rights, as far as we know, and inconsistent with our desire to be long-term aligned shareholders.
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“Engaged Capital has continued to seek control of key strategic decisions through more covert means, proposing the creation and control of a new Board committee that would possess unnecessarily broad discretion and power”
“While Engaged Capital claims that it seeks value for all stockholders, we believe it is seeking effective control by committee”
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Engaged Capital provided the Board with a draft charter of the proposed Strategy and Finance Committee which clearly indicated that the committee’s findings would be non-binding. The committee would make recommendations to the full Board and only the full Board would have the authority to approve potential changes to Rovi’s strategy. Furthermore, the committee would be composed of independent directors acting in accordance with their fiduciary duties which bind them to represent the interests of ALL shareholders.
There is no reasonable basis to allege that an independent committee of the Board would give Engaged Capital control.
Since the committee charter we proposed made it clear that Engaged Capital has no intention or ability to use this independent committee of the Board to “take control” of Rovi, why is the Board so resistant to its formation?
Engaged Capital only profits on its investment in Rovi in the same manner as all other shareholders – if Rovi’s stock goes up.
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“What is Engaged Capital’s alternative strategy?”
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Engaged Capital has presented a very clear plan to shareholders which we believe would greatly enhance shareholder value creation and mitigate risk to investors. We have plainly identified the problem areas and have stated what steps we believe are necessary for correction. Our nominees are not yet elected and do not have the inside information that current directors possess. Therefore, we would not recklessly detail positions before analyzing all of the relevant inside information necessary to make fully informed recommendations. Ours is a measured and open minded approach. If elected, our nominees will work with the rest of the Board to hone in on specifics based on all the information available to directors and in accordance with their fiduciary duties to all shareholders. That said, many of the steps that must be taken are obvious to any interested observer.
For example, what we all know from publicly available information, is that the Company’s strategy historically has not worked, Rovi’s stock performance indicates shareholders do not anticipate it to work now, and in the meantime the Company intends to invest significant amounts of money hoping for a payoff in two years. Clearly, supervision at the Board level must be meaningfully improved.
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THE INCUMBENTS WE SEEK TO REPLACE
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Chairman Andrew Ludwick
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Gaps in Experience: NO Service Provider experience, NO OTT experience, NO IP experience and although he previously served as executive at two networking companies, those primarily sold hardware related products. In any event Mr. Ludwick has been retired for 17 years.
Taking Responsibility: Mr. Ludwick has been on the Rovi Board for 9 years and its Chairman since 2008 and is directly responsible for significant value destruction during his tenure.
Credibility with Shareholders: Last year, only 74% of shareholders were willing to give Mr. Ludwick another year on the Board even though he ran unopposed.
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James Meyer
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Gaps in Experience: NO Service Provider experience, NO OTT experience, NO IP experience. Mr. Meyer is the CEO of Sirius XM Radio, where individual consumers comprise the majority of Sirius’ customer base. Mr. Meyer has a consumer facing background, an area which Rovi has expressly stated that it has deemphasized in order to focus primarily on its Service Provider customers.
Taking Responsibility: Mr. Meyer has been on the Rovi Board for 18 years and is directly responsible for significant value destruction during his tenure.
Credibility with Shareholders: Last year, only 74% of shareholders were willing to give Mr. Meyer another year on the Board even though he ran unopposed.
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James O’Shaughnessy
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Gaps in Experience: NO Service Provider experience, NO OTT experience. Mr. O’Shaughnessy’s IP experience is as an Intellectual Property (IP) lawyer, in other words primarily in an advisory capacity. It appears as though Mr. O’Shaughnessy has limited operational experience. While patent law and IP is relevant to Rovi, it does not appear as though Mr. O’Shaughnessy has much relevant experience developing software products or selling products into Rovi’s targeted Service Provider customer base, as his primary roles have been as counsel only. The majority of Mr. O’Shaughnessy’s career was spent at Rockwell Automation, which is a leading industrial company with no real exposure to Service Providers.
Taking Responsibility: Mr. O’Shaughnessy has been on the Rovi Board for 11 years and is directly responsible for significant value destruction during his tenure.
Credibility with Shareholders: Last year, only 74% of shareholders were willing to give Mr. O’Shaughnessy another year on the Board even though he ran unopposed.
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ENGAGED CAPITAL’S NOMINEES
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Ø Experience in the online video and Over-the-Top (OTT) industries
Ø Close relationships with key C-level personnel at large Tier 1 and Tier 2 service providers
Ø Experience operating software companies
Ø Successful track records building next generation software products accepted by the largest service providers
Ø Significant experience with Intellectual Property Management
Ø Track record of growing revenue and driving cost efficiencies
Ø Significant experience developing strategies that increase shareholder value, including with respect to capital allocation strategies
Ø Significant expertise in improving governance structures including developing executive compensation plans that align pay with performance.
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David Lockwood
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· CEO and President of EnergySolutions (current)
· Chairman and CEO of Liberate Technologies
· CEO and President of Intertrust Technologies
· Director at Unwired Planet, Steinway Musical Instruments and BigBand Networks
· Managing Partner of the ValueAct Small Cap Fund
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Raghavendra Rau
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· Former CEO and director of SeaChange
· Director of iProf Learning Solutions
· Director at Aviat Networks
· Director at Microtune Inc.
· Former leadership positions with Motorola including SVP Strategy, Networks and Enterprise, SVP Mobile TV Solutions
· Director, Center of Telecom Management, USC
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Glenn W. Welling
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· Founder and CIO of Engaged Capital (current)
· Director at Jamba
· Pending director at Medifast
· Managing Director at Relational Investors
· Managing Director at Credit Suisse
· Partner and Managing Director of HOLT Value Associates (acquired by Credit Suisse)
· Senior Manager at A.T. Kearney
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Thank you for your support,
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/s/ Glenn W. Welling
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Glenn W. Welling
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Engaged Capital, LLC
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