Engine Capital issues letter to board of Care.com
Engine Capital, a sizeable shareholder of Care.com, issued an open letter to the company's board encouraging the board to initiate a parallel process to explore strategic alternatives while searching for a new CEO and implementing various initiatives identified by Engine. The letter said, "...These discussions have led us to the conclusion that Care.com is a unique asset that is currently underearning, misunderstood by the market and significantly undervalued. The Company is the undisputed leader in a very large and fragmented market. It has the largest supply of caregivers and the largest number of families in a "winner take all" marketplace. It owns a full suite of payment products. It has a strong brand as evidenced by high net promoter scores. It also owns a valuable separate but related business with [email protected] And yet, despite all these valuable assets, the Company has miserably failed to create any shareholder value over any relevant measurable period as shown in the below table.1 CRCM's current valuation of approximately 1x revenue represents a deep discount to the valuation of other similar online marketplaces and reflects investors' concerns regarding Care.com's business model and future prospects following the March 8, 2019 Wall Street Journal article questioning the Company's safety practices. This article and its surrounding publicity have jeopardized one of the Company's core pillars, namely, the trust in Care.com's services and in the Company's brand itself. This erosion of trust puts the long-term relationship between Care.com and its consumers at risk and creates significant uncertainty in the Company's long-term financial model. The first cracks to this financial model were visible when the Company reported its Q2 2019 results with paying families in the US consumer business declining quarter-over-quarter and traffic negatively affected by word-of-mouth. The reduced traffic generated from word-of-mouth is particularly troubling as it is one of the lowest cost customer acquisition channels. These negative trends, in addition to the increased spend in safety and cybersecurity, are anticipated to significantly detract from the attractive unit economics the Company has previously enjoyed. While we believe many of these issues are fixable, it will take time and there are significant execution risks, including the appointment of a new management team, the restoration of the trust factor and the establishment of new unit economics for the business. At the same time, the Company has significant strategic value and certain buyers may be able to pay a price that is superior to the standalone value of the Company, especially taking into account the time value of money and execution risk. We believe the Board has a fiduciary duty to immediately start a parallel process whereby it continues the search for the Company's next leadership team but at the same time explores the Company's strategic options to assess what a buyer may pay for the Company today... We firmly believe that the Company is at a crossroads and that time is of the essence for significant changes to be made given the Company's persistent underperformance. The Board has a unique window of opportunity to pursue a parallel strategic review process while working on the value enhancing initiatives described above. It is our desire to work collaboratively with the Board to improve the Company and drive shareholder value, which is why we request an opportunity to discuss these important matters further with the Board. We look forward to engaging with you and other shareholders to discuss these topics further."