Safeguard CEO Zarrilli is out after shareholders rebel (Update)

Safeguard Scientifics CEO Stephen Zarrilli and chief financial officer Jeffrey McGroarty are leaving their posts at the Radnor-based investment company, Zarrilli said in a letter Friday to tech firms Safeguard has invested in.

The moves by Zarrilli and McGroarty, who will be replaced by Safeguard colleagues, follow complaints by a group of hedge fund investors that Safeguard, which invests in small software firms, has been spending too much on its operations and borrowing too much without earning enough profit. The dissident investors had not been satisfied with Zarrilli's plans to lay off staff and cut back on new investments.

Nor were the dissidents fully satisfied by Zarrilli's departure, which leaves Safeguard's board intact. Decrying what he called "scorched-earth" tactics by a Safeguard board intent on staying in power, Darren Wallis, managing partner at Safeguard shareholder Maplewood Capital LLC, said he and allied investors "are deeply disturbed how Safeguard has conducted itself throughout this entire engagement."

Wallis is one of several investment fund managers who have called on fellow Safeguard investors to back a slate of insurgent candidates that may challenge Safeguard-backed incumbents if they run in this year's board elections, which have not yet been scheduled, as company officials continue talking with some of the dissidents.

Wallis called the company's CEO and CFO changes a "reactive" move by a board of directors that "needs new blood." He added that "the new CEO has zero investment management experience," and questioned whether the current board or newly promoted managers can run the company effectively. "We further wonder what the new CEO's pay package will be and what the severance packages for the outgoing executives look like. When will they be disclosed?"

In his letter to Safeguard-backed companies, Zarrilli wrote: "Today, we announced a series of management changes to further align the organization and cost structure with the company's newly announced strategy. I will be retiring from Safeguard, effective Sept. 30 of this year. Brian Sisko, who you already know, will assume the role of president and chief executive officer on July 1, and we will use the remaining three months of my tenure to help facilitate a seamless transition.

"In addition, senior vice president and chief financial officer Jeffrey McGroarty will depart from the company on June 30, and senior vice president of investor relations and corporate communications John Shave will depart thereafter at a specific date yet to be determined. David Kille, Safeguard's corporate controller, will assume the role of chief financial officer, effective June 1, 2018. Dr. Gary Kurtzman, senior vice president and managing director, health care will remain in his role and will work closely with Brian in providing oversight of the partner companies …

"I have enjoyed working closely with you. Safeguard and I have been driven by a strong belief in your innovative business, and the new senior team led by Brian, David, and Gary will continue to work closely with you as your business advances towards milestones and your ultimate goals."

In a separate statement sent to shareholders, Safeguard chairman Richard Rosenthal said the moves were part of a reorganization that should help shave $6 million from the company's yearly expenses.

Safeguard, founded in the 1950s by investor Warren "Pete" Musser, bought minority positions in a series of industries, including electronics, television (he was an early backer of QVC), and the 1990s dot.com boom. Musser and investment promoters he trained were instrumental in persuading the Pennsylvania public pension systems to invest in funds they supported, though some did not result in big client profits or create many large, long-lasting companies.

Safeguard currently owns stakes in more than two dozen companies, including Old City-based retailing-software pioneer Weblinc, digital ad tech developer MediaMath, financial tech developer Transactis, and health software developer Syapse.

Rosenthal added that Safeguard's plan for new top management "makes clear its commitment to executing on the company's new strategy and creating a leaner and more agile organization focused on maximizing the capital that is available for distribution to shareholders. We are also confident that Brian Sisko's mergers and acquisitions, corporate finance, and legal backgrounds, as well as his operating experience and extensive knowledge of and familiarity with Safeguard's partner companies, make him the ideal choice to lead the organization as it pursues this strategy."

Investors who called for Zarrilli to step down, arguing that staff cuts last winter didn't go far enough, include Ira Lubert, a former Safeguard official who now manages more than $15 billion in real estate and other private assets, for clients including Pennsylvania's major pension funds, SERS and PSERS.

Zarrilli is also chairman of the board at La Salle University.