Harvard educated Eric Rosenfeld, President and CEO of New York-based Crescendo Partners, previously held the position of managing director for 14 years at Oppenheimer & Co, as well as its acquirer CIBC.
Crescendo Partners is an investment firm that specialises in value and activist investing. The firm has been in the news recently for its activist demand that Aeropostale Inc (NYSE:ARO), the struggling chain that retails teen and children’s clothing, sell itself to a suitable buyer. It invests primarily in small- and mid-cap companies in the United States and Canada and has secured board positions in 21 companies over the past 15 years.
The Spring 2014 investment newsletter ‘Graham and Doddsville’ from Columbia Business School carries an interview with Rosenfeld that is notable for his views on value investing, activist investing techniques and his experiences at targets Aeropostale Inc (NYSE:ARO) and Cott Corporation (NYSE:COT).
Eric Rosenfeld: Investing thesis
The focus is to locate value opportunities which carry a difference between “where the stock is trading and where we think it can trade.” The firm has a benchmark for at least 50% upside or maybe more depending on the likely timeframe for the investment.
The firm typically runs investment screens to scout for opportunities across metrics such as enterprise value/free cash flow (the most important) and others such as enterprise value/operating income, enterprise value/EBITDA and the most pessimistic case – liquidation value.
Apart from investment screens, Rosenfeld also relies upon investment ideas from director-colleagues at over 20 boards, analysts, disgruntled shareholders, fellow value investors and last, but not least, employees that lost have their jobs or are unhappy in their current positions.
Investments usually run on average around three years or more.
“Stocks may immediately increase after we surface. That frequently happens but usually we get on the board and work over a period of years to bring out value. Occasionally, we’ll call for the sale of a company – we did that a while back with Aeropostale,” says Rosenfeld.
At Cott Corporation (NYSE:COT) Crescendo found a company that had been mismanaged into the ground by a new CEO and his new-fangled ideas. Rosenfeld initiated an 8% investment in the company and negotiated for four board positions out of 11. His simple formula: turn the clock back to what worked in the past.
“We didn’t have to figure out a new strategy – we just had to go back to the old strategy, stop competing against our customers, cut the overhead that had been built up, get rid of FortiFido, and take the sign off the wall,” says Rosenfeld. [The fired CEO apparently put up a sign on the wall that said, “We’re not here to make money, we’re here to make history.”]
“He ultimately succeeded at both – he didn’t make any money and now he’s history,” quips Rosenfeld.
Activism hunting grounds – Canada versus the US
Rosenfeld provided interesting insight on why Canada was a preferred destination for activist investing compared to the United States.
“The laws are different in Canada than in the United States and there are more favourable to shareholder democracy in several respects,” he says.
A Canadian law that allows an investor owning 5% of a Canadian corporation to requisition a shareholder meeting is a powerful weapon in the hands of an activist investor. Since there are no staggered boards, the investor might well succeed in replacing the entire board at the requisitioned meeting.
Another key difference: an investor in Canada is not required to publicly disclose his holding until it reaches a 10% threshold in the target company.
Rosenfeld also points out that the poison pill defence, a favourite of target companies in the United States, is singularly ineffective in Canada – “the view there is that, since the shareholders own the company, they should have the ultimate power in deciding whether a company is sold.” Machinations by the board, such as poison pills, are likely to be overturned by the courts if shareholders would like to accept an unsolicited offer, bypassing the board.
Full issue of Graham & Doddsville can be found below