1. Jeff Ubben Headhunter: First Ballmer, now Murdoch [link]
The big news was that Jeff Ubben got Fox’s Rupert Murdoch to step down rather quickly, and our consensus was that Ubben was going make an even bigger bet on Fox. ValueAct went active on Fox back in May. Using the funds from its Valeant stake reduction, Ubben made Fox a full position. Ultimately, Making it ValueAct’s new Valeant. And like Valeant, Fox could become a serial acquirer and consolidator of the cable space, perhaps? Look out Malone.
2. Nelson Peltz: Is he really on fire? [link]
Talking about Nelson Peltz’s Pentair activist target and his track record. There’s a number of smaller players in the industrial space ripe for a buyout by Pentair. Peltz has been pushing for consolidation in the Pentair industry, versus a breakup, which could be a positive shift in the winds for Peltz. Peltz’s last foray into the industrial space, Ingersoll Rand, only generated returns in-line with the market.
3. Vanguard: A new corporate governance policy [link]
Our index funds are going to own these companies, whether everyone loves them or everyone hates them. And we’re going to own them in a significant way. On average, our funds own about 5 percent in aggregate of just about every company we own in the U.S.
So we’re going to be significant holders, and we’re going to hold practically forever. We don’t have the opportunity to sell if we don’t like something that’s going on.
We’re not in the governance business. We’re not in the compensation business. But we’re in the investment business. We’re doing this because we think it supports the returns of the companies we invest in for the long term, companies that we can’t sell.
4. Troubled real estate spinoffs [link]
The trend of forming REIT spinoffs has been growing, with the activists looking to score a victory by spinning off the real estate into a REIT. The REIT shares can be then sold and a form of dividend or buyback benefit is passed onto the investors without spending a single dollar. And to top it off, the transaction is usually structured to be tax-free.
Tax-free – that’s helped catch the attention of the IRS, which is debating whether the transactions fulfill the spirit and form of the law. The IRS recently released a notice indicating that it, along with the U.S. Treasury Department, is concerned that corporations are using spinoffs of assets to avoid paying taxes on otherwise taxable transactions.
5. Qualcomm: Fire the engineers, the MBAs will save us [link]
It’s no secret that JANA Partners is pushing the company for a split. The tech giant is “exploring” such options. It’s also firing some 20% of its workforce, including the engineers that helped build up its “valuable” patent portfolio. Something that’s a bit overlooked.
Cost cutting doesn’t help fix its declining business. Neither will splitting up the company. The company is well off the mark with Snapdragon and the loss of the Samsung S6 design is just the beginning. We’ll see if Qualcomm can get back in the saddle with the S7.
The real fix is in Qualcomm’s board, which is well tenured and been handing out dilutive compensation packages like…
Well, the issue is that it takes engineers to build products and patents. Much like the R&D conversation at DuPont, it takes a relatively high cost to build and develop smartphone tech.
No one expects Barry Rosenstein to understand this. After all, a Wharton MBA has nothing to do with engineering.
6. Shareholder activism coming to Europe [link]
The big key for Europe is that a lot of activism is done behind closed doors and out of the public eye. There’s a lack of media attention on such gentlemanly activism, versus the media starved American fund that comes complete with poison pen letters and management bashing. Over half of European activist campaigns never enter the public domain.
But now the typical American activist, facing too much competition in American markets, is hungry to bring what’s done in the dark, into the light.
Part of what’s driving the current resurgence of activism in Europe is the record levels of cash on the books there. Coupled with the low cost of debt and renewed spotlight on corporate governance is really driving the market.
7. Meet Jeff Ubben [link]
Jeff Ubben and his ValueAct activist hedge fund has killed it. His average 13D is up 23.5% annualized. All his closed 13D campaigns have returned 20% annually but one. C.R. Bard didn’t work out. His Valeant position is a big standout with a 58% CAGR, but there’s plenty of other winners, including Verisign, Rockwell Collins and Gardner Denver – all with 50% CAGRs.
8. The request for activist [link]
“Periodically, we are approached by large institutions who are disappointed with the performance of companies they are invested in to see if we would be interested in playing an active role in effectuating change.” — Bill Ackman, Pershing Square Capital
This is what’s known as an RFA — a request for activist.
Institutional investors, long considered to be allies of corporate managements, have started siding with the activists.
That’s because activist investors are getting shit done (“GSD”). Recall, ValueAct Capital with only a 1% stake in Microsoft got a board seat and is credited with pushing out CEO Steve Ballmer. This was only possible when Microsoft realized that ValueAct represented the voice of many large shareholders as well. ValueAct Founder Jeff Ubben reached out to Microsoft’s largest shareholders to present his plan.
9. Warren Buffett comments on activism [link]
Buffett says that “It’s in Wall Street’s interest to scare management about activists. They’re not dying to have an activist knock on your door, but it doesn’t cause them to break out in tears either because you take them on and they get all involved in your strategy. And it’s their job, to some extent, to make you worry even more than you probably should.”
10. Bill Ackman’s strange defense of Valeant [link]
Ackman asked Pearson, “Mike, is there any fraud going on at the company?” Pearson said he didn’t know of any fraud.
Still – Ackman has privately said that if Pearson hides in the bunker, he can’t be the VRX CEO. Ackman knows that VRX needs a leader to repair instill confidence and repair its reputation, which will include testifying before Congress. Ackman notes – “these are not Mike’s best skills.”
One issue – and perhaps one that Ackman realizes – is that the prospect of not having Pearson as CEO would be even more troublesome for investors.
A lot of people point to the stock price growth and M&A strategy to Pearson personally, Jeff Ubben in all likelihood included among them, who helped recruit Pearson and structure the pay package that paid big for aggressive M&A and drug pricing.
Ackman worries that Pearson can’t manage the political and PR issues, but knows that without him the long-term vision of the company would be in question. A similar story played out at Ocwen with Bill Erbey. If Ocwen-Erbey is any inclination, It’s always better to get out in front of these things.
Truly a catch 22.
It appears that Valeant is getting out in front of this by taking Pearson’s recent hospitalization to push him out. That’s signals a shift in the company’s future growth strategy (read: shift away from M&A and toward cost cutting/better monetization of its current assets).