• 13 Aug 2013 at 6:12 PM

77-Year-Old Man Good At Twitter

Once upon a time before there were activist hedge funds there were corporate raiders, whose business model was

  • buy stock in company,
  • be annoying,
  • sell stock back to company at higher price.

This model had many delights of which perhaps the greatest was that you couldn’t really, like, do damage to your reputation. The more annoying you are: the more the company wants to get rid of you! So the more they’ll pay. And since you’d really only get into this business if you had some natural predisposition to annoyingness, it was a nice way for some people to make a living doing what they loved. Sadly it sort of petered out after the 1980s, though you still see variants on it occasionally.

It’s fun to contrast Bill Ackman’s 2,000-word letter to the J.C. Penney board referencing his previous “several-thousand-word email to the board outlining my concerns about our current trajectory” with Carl Icahn’s 280 characters about Apple. Read more »

Starboard Value’s letter to Smithfield Foods arguing that Smithfield is selling itself too cheaply to Shuanghui International makes for tough reading if you think pigs are cute. The 16-page letter does a pretty detailed sum-of-the-parts valuation of Smithfield at, like, a pig-by-pig level, and it doesn’t end well for the pigs. Sum-of-the-parts value has a disturbingly literal meaning, for them.

How did this letter come about? I imagine it as something like this:

  • Earlier this year, Starboard analyst recommends Smithfield on the basis of a long well-reasoned report about how it’d be worth 2x its current price if it were broken up.
  • Portfolio manager is persuaded and buys a chunk of shares starting in March, at an average price of around $27, planning to mount an activist campaign to break up the company.
  • Smithfield announces merger at $34 a share on May 29.
  • Starboard makes several million dollars on paper.
  • Starboard celebrates, congratulates analyst, etc.
  • Some spoilsport interrupts celebration saying, “well, but really the thesis was that Smithfield could break itself up and we’d make even more money.”
  • “Really, analyst, this counts as a loss.”
  • “Go back to your desk and repurpose your original report into a letter that we can mail to Smithfield.”1

Read more »

“Looking for a juicy [hostile] takeover candidate? A new report suggests you might find one at Fifth Third Bancorp, the utility holding company Ameren or ConAgra Foods,” which shows you how much that new report knows. Oh, you’re gonna launch a hostile takeover on a regional bank? A regulated utility holding company? Let me know how that works out for you. Over here, I’m going to focus my imaginary hostile takeover activity on industries where hostile takeovers are, y’know, possible.1

That’s from this DealBook piece about a company called RotaryGallop and a report they’ve done on corporate vulnerability to activists. The report can be yours for $4,550, and needless to say I admire their gumption for creating a measure of corporate vulnerability that seems shall we say somewhat unmoored from reality, writing it down in a report, charging companies $4,550 to read it, and getting it written up in the Times. Still:

To prepare the report, Rotary Gallop analyzed share ownership at 459 of the companies in the Standard & Poor’s 500-stock index — essentially all those without multiple share classes. It then used December 2012 share ownership data from FactSet Research to model millions of hypothetical up-or-down votes, determining which shareholders could most often tip the outcome one way or the other. …

The calculations were straightforward, but complex, [RotaryGallop CEO Travis] Dirks said. Read more »

If you’re an activist investor your job is to (1) think of an idea for how to make a company’s stock go up, (2) buy stock in the company, (3) convince them to do your idea, and (4) sell high. Step 3 tends to involve lots of attention-seeking – it’s easier to wear a company down into doing your idea if they’re constantly hearing about it from other shareholders and reporters and stuff – but steps 1 and 2, importantly, don’t.1 If you tell everyone about your great idea for Apple to issue GO-UPS,2 then they’ll all realize that Apple will certainly do it and unlock tens of billions of dollars of value, so they’ll bid up the stock before you can buy it and you’ll lose the opportunity to benefit from all those gains. That may be a bad example but just work with me here.

There’s another way of putting that, which is: if you secretly conceive of an idea to make Apple a better company, and then secretly buy up a bunch of Apple stock, and then announce to the world “surprise! I have 12% of Apple’s stock, and a brilliant idea that starts with a thematically appropriate lowercase i!,” and the stock goes up, and you make a lot of money – isn’t that unfair? You got to buy stock at the low, pre-publication-of-your-idea price; the people who sold to you were bamboozled into selling out too low because they didn’t know about your great idea. It almost “smacks of insider trading.”

Or something. I may not be doing this theory justice because I think it’s silly: that great idea is your idea; why shouldn’t you be able to make money off of it? (And why should anyone else?) The money is your incentive to come up with the idea in the first place, and do the hard ego-stroking work of pitching it to CNBC and the target company; if you had to share it with free-riders why would you take on the responsibility? We talked about this a little last year when there were vague rumors that the SEC was buying into it, and that they might require investors to disclose 5% stakes within 1 day of acquiring them (instead of the current 10 days), and include synthetic share ownership in computing the 5%, in order to make it harder for activists to secretly accumulate shares. I have not heard much about that proposal since, though I hesitate to assign any causality.

But last week in another, colder part of town, someone proposed the same thing. Canada, I mean. Canadian securities regulators proposed: Read more »

  • 07 Dec 2012 at 3:48 PM

Al Gore Wants You To Conserve Your Shares

Here is a pleasing story that is probably not a thing, but still a thematically relevant non-thing:

Corporations would award long-term shareholders “loyalty rewards” of extra dividends, warrants, and additional voting rights as incentives to overcome short-term earnings focuses of corporations and investors, according to a concept Mercer is developing with two other organizations.

Good luck with that, Mercer, “who is working on the project commissioned by Generation Foundation … [which] is an advocacy arm of Generation Investment Management, whose chairman is Al Gore.” There’ll be a report by the fall so stay tuned. For a report.

I like it! For two reasons, one good, one evil. First, good: why shouldn’t companies decide what sort of a thing shareholding is? The old notions of public-company shareholding – shareholders own the company, companies owe them fiduciary duties, one share one vote, etc. – all seem to be eroding.1 That seems good! “Shareholders provide money and in exchange they own the company” is a shorthand; really shareholders provide money and get some sort of bundle of rights – embodied in the corporate and securities laws and the corporate charter and bylaws – giving them residual cash flows and a vote and whatever else. Read more »

Starboard Was Buying Office Supplies Last Week

I don’t follow NASCAR, and it’s possible that this puts me out of touch with the bulk of stock market investors, but I feel like there’s a person or robot who regrets writing this sentence last Wednesday:1

Office Depot Inc. stock surged 16.40% to $2.20 after the company announced that Tony Stewart, driver of the No. 14 Office Depot/Mobil 1 Chevrolet in the NASCAR(R) Sprint Cup Series(TM), will join the Foundation to donate 6,000 new sackpacks to non-profit organizations, schools, and agencies in and around the Chicagoland area.

Doing some math, ODP’s 285 million outstanding shares times Wednesday’s forty cent move gives you $114mm of market cap added on Wednesday, which works out to $19,000 per donated sackpack, which seems like a lot, though I cannot be sure since I don’t exactly know what a sackpack is.2

Other possibilities present themselves. Here is Starboard Value LP’s Form 4 filed today, noting among other things that Starboard bought 3.1 million shares – about half a day’s volume – last Wednesday at an average price of $2.21. It kept going, totting up a total of 8.2mm shares in the last three days of last week, which, added to some other shares that it acquired earlier (in the month? week? day?3), gave it a total of 38mm shares, or 13.3% of the company. Also some interest in where things are headed: Read more »

When a company does something that corporate-governance activists really don’t like, like adopting a poison pill, typically they announce that “the board decided unanimously to punch you in the face for your own good.” There’s some perception that, if they’re all in it together, the directors can’t be up to anything too unsavory. Forest Labs doesn’t have that option:

Forest Laboratories, Inc. (NYSE: FRX) today announced that its newly constituted Board of Directors adopted a stockholder rights plan and declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of Forest Laboratories common stock.

The Board adopted the rights plan in response to the recent rapid accumulation of a significant portion of Forest’s outstanding common stock. The rights plan is intended to protect the Company and its stockholders from efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders. The rights plan also has an exception for an offer for all shares that is accepted by a majority of the Company’s shares and treats all shareholders equally.

That must have been an awkward meeting! For those of you sensibly not following the Forest Labs saga, that “newly constituted Board” was newly constituted with Carl Icahn nominee Pierre Legault, who was elected two weeks ago in a proxy contest, beating out one of the company’s nominees. The other nine directors are still the ones who opposed Icahn in the proxy contest. And the rights plan was designed to keep Icahn from buying any more of the company. Presumably it was approved 9-1. Read more »

It’s August, things are slow, and I have a suspicion that Carl Icahn let his lawyers go on vacation and is just writing his two-sentence letters to CVR Energy himself. Bill Ackman, not so much:

To the Board of Directors of General Growth Properties:

… [eight pages] …

I look forward to speaking further with the Board about the above.

He even cc’s a lawyer.*

The saga here is long and winding; the letter actually explains it well or you could read this Reuters article but in sort-of brief:

  • Pershing Square is the second-largest shareholder of GGP, with 7.7% of the company, or 10.2% on Ackman’s somewhat aggressive accounting**
  • The largest holder is Brookfield Asset Management, with 38.2% plus warrants for 4% more.
  • Pershing and Brookfield got their shares mostly in the process of helping GGP out of bankruptcy, which it was in due to some unpleasantness over some loans, but it’s doing great now thanks for asking.
  • But keep in mind: Read more »