Trian/Dupont: Trian’s proxy fight at Dupont was significant on many levels. While viewed by many as a “loss” for Trian, it actually showed how far activists have come. Trian got the recommendation of ISS in a proxy fight against an outperforming mega-cap company and almost won a seat for its founder, Nelson Peltz, who received 43% of the vote. This proxy fight also had ramifications on activism and how companies and their advisors dealt with activists in the wake of Dupont. If Trian almost got a seat at Dupont, they are almost certain to get a seat at smaller companies that are underperforming. This led to many quick settlements in the wake of Dupont (i.e., Sysco, Cheniere, Baxter, Pentair). Of the 82 live activist 13D situations in 2015, 24 resulted in a settlement before 2015 even ended, versus 81 live activist 13D situations in 2014, of which 16 settled before the end of 2014, with another eight settling during 2015. It also was a cautionary tale against making proxy fights polarizing events. Ellen Kullman made it an “us versus them” fight and when the Company won the proxy fight and was unable to execute she became the scapegoat and lost her job, despite the fact that Trian never advocated for that. Boards, CEOs and their advisors are starting to see that in many cases, working with the activist is the wiser path.
Valeant: This company has two of the most respected activist shareholders with very large positions. When the stock went from a high of $262.52 on August 5, to $70.32 on November 17, both ValueAct and Pershing Square took large hits to their P&Ls for the year and smaller, likely temporary, hits to their reputations. ValueAct got involved with Valeant in 2006 when it was a $1.7 billion company. It has had a member on the Board for virtually the entire time as the Company soared to a $90 billion market cap., making an incredible return for ValueAct and its investors. Pershing Square got involved in 2015 after Pershing Square/Valeant’s failed acquisition of Allergan. While they did not end up with Allergan, in less than a year Pershing Square made a 70.93% return on its $3.7 billion investment in Allergan. After meeting the Valeant management and seeing the platform they developed to grow their business through acquisition, Pershing Square rolled over a portion of its Allergan proceeds into Valeant. Months later, Valeant’s stock was decimated primarily from two events: (i) the bad press from an unethical and unrelated investor in the healthcare sector, Martin Shkreli, who acquired drug products and tremendously raised the prices and (ii) the public presentation of a short seller who called Valeant the next Enron. Valeant has raised the prices of some of its drugs, but not to the same extent as Shkreli, who has since been arrested by the FBI, and Valent has since stated it will no longer rely on price increases. The short seller did have some valid points that led to Valeant cutting its ties to specialty pharma company Philidor, but Valeant is far from the “next Enron.” While ValueAct and Pershing Square were criticized for not doing enough diligence, there are a few important things to note here: (i) when ValueAct did its due diligence on Valeant, it was a $1.7 billion company, and while Valeant did enter into the Philidor relationship while ValueAct had a member on Valeant’s board, it was such a small part of Valeant’s business that it is likely that the Philidor relationship was never raised to a board level discussion; (ii) Pershing Square does as much, if not more, due diligence and detailed analysis on its concentrated investments than any other hedge fund and if they did not uncover the questionable relationship with Philidor, it is evidence of how small of a piece of the overall Valeant business that was, not because of sloppy due diligence; and (iii) even after the stock imploded, ValueAct had a 940% return on its Valeant investment versus 66% for the S&P500 over the same time period and Pershing Square had made a 14.58% return on its Allergan/Valeant investment versus 3.38% for the S&P500.
H Partners/Tempur Sealy International: H Partners, a fund not very experienced with activism, missed the nomination deadline and launched a withhold vote campaign against three of Tempur Sealy’s eleven directors, including its CEO. Withhold vote campaigns are not binding and have historically been ignored by companies. However, on May 8th H Partners showed up at Tempur Sealy’s Annual Meeting in Boston and delivered an overwhelming majority of the votes cast (80%+) against the election of the three targeted directors. The landslide vote was enough to shake up the center of power on Tempur Sealy’s Board. By May 11th, H Partners and Tempur Sealy had announced an agreement enacting a series of significant leadership and board changes at the company, including, among others, the immediate resignation of the CEO; the immediate resignations of the two other targeted directors; the immediate appointment of H Partners’ Usman Nabi to the Board; the formation of a CEO Search Committee to be led by Mr. Nabi; and the appointment of an additional director recommended by H Partners. This campaign was under-covered in the media, but showed, as much as anything else during 2015, the evolution of shareholder activism, the increased respect activists get from institutional investors, and the new tools activists have at their disposal to effect change.
Carl Icahn/Larry Fink on CNBC: In an interview with Carl Icahn and Larry Fink that was supposed to be about the evils of shareholder activism, Icahn diverted the conversation 180 degrees to the danger of the high yield debt market and ETFs created and promoted by Blackrock. By the end of the interview, Icahn was wearing the white hat and Fink was on the defensive. A large part of being a successful activist is the ability to persuade and command a room. This interview is Exhibit A as to the communication and persuasion skills of Carl Icahn.
Pershing Square Goes Public: Technically, a late 2014 story, but important enough to include it this year (also, we did not do a top ten list last year). With permanent capital being the holy grail of activist investing, Pershing Square raised more than $3 billion of permanent capital in an Amsterdam IPO. This will allow Pershing Square to do more activism, have an even longer term perspective and show the conviction that is so important for an activist investor without having to worry as much about redemptions.
[drizzle]JANA/Neuberger Berman: A unit of investment manager Neuberger Berman bought a 20% stake in activist hedge fund JANA Partners. At the time, JANA managed approximately $11 billion and the deal was reported to be valued at $2 billion. First and foremost this shows the respect that Neuberger Berman has for Barry Rosenstein and JANA Partners, but on a more global level, it is another sign that activist investors are gaining mainstream acceptance.
Ubben/Fox: In 2014, ValueAct partner, Mason Morfit, was named to the board of Microsoft – certainly one of the biggest activist events of 2014. A year later, ValueAct founder Jeff Ubben was appointed to the board of Twenty-First Century Fox, a $70 billion company controlled by the Murdoch family. An activist being invited on to the board of a $70 billion company is almost unheard of, but one that is family controlled is certainly a milestone. Moreover, Ubben was not invited on as a response to threats or to avoid a proxy fight. This invitation was clearly a reflection of the reputation that Jeff Ubben has among institutional investors, directors and CEOs. But this was still only possible with a competent and confident board that embraces debate and understands the value of a responsible, long-term shareholder representative on the board. ValueAct gets a lot of credit for their ability to get board seats at large-cap companies, but just as much of the credit should go to the boards who embrace them.
Starboard/Darden: Technically, this was a 2014 proxy fight, but the value creation has largely taken place in 2015. On October 14, 2014, Starboard successfully replaced the entire board of Darden Restaurants, Inc. and effectively took over operations of the Company, with Jeff Smith, Starboard founder, as Chairman. On that date, Darden’s stock price closed at $46.17. Today, it trades at $62.42, a 35.20% return in just under 15 months, during which time the S&P500 returned 2.39%. To put that into perspective, it took the prior management team approximately five years (2009 – 2014) to achieve a 35.20% return on the Company’s stock, during which time the S&P500 was up over 70%. Moreover, after getting control of the Darden board, one of the first things Starboard did was implement shareholder friendly corporate governance provisions which make it easier for shareholders to remove them if they are unhappy with the Board’s performance.
2015 and Activism: 2015 was one of the worst years for activist hedge funds in recent memory. Aside from 2008, many of these funds recorded their first or second losing years ever, underperforming the slight gain of the S&P500. Activists were not necessarily singled out, as most value investors (a category that includes many activist hedge funds) failed to perform well during 2015. However, activist were also less effective executing their catalysts than in previous years. Many M&A catalysts were not consummated or were consummated poorly and while activists have been more successful than ever in quickly attaining board seats, they were less effective in 2015 converting the activist success into stockholder value. One reason for this certainly is that activism, particularly board seat activism, is a long term strategy and we are just looking at one year. But another potential reason is that activists were victims of their own success in 2015. As the strategy becomes more accepted, activists are seeing more amicable settlements where the activist gets one or two board seats and signs a standstill agreement. It is much easier to implement an activist campaign after winning a proxy fight and having a shareholder mandate of sorts than it is after quietly receiving one board seat and signing a standstill. Maybe activists need to get better accustomed to working in this new environment or maybe quick settlements and slower value creation are part of the new normal in shareholder activism. In any event, it is highly unlikely that activist will let another year go by without creating shareholder value with their activist catalysts.
Relational Investors Shutting Down: Relational Investors was founded in 1996 and is a true activist pioneer. Founder, Ralph Whitworth, was recently named the “Lifetime Achiever” by the International Corporate Governance Network, the highest honor bestowed by this global organization of investment professionals from over 50 countries. He served on three Blue Ribbon committees sponsored by the National Association of Corporate Directors on director compensation and corporate governance. He was the president of United Shareholders Association (pro bono) from its founding in 1986 to its dissolution in 1994. In 1989, he authored the petition for rulemaking that made a major change in 1992 of the Securities and Exchange Commission’s shareholder communication and compensation disclosure rules. In addition, he is considered an expert on corporate governance issues. He was invited to present his views before Congress, the Securities and Exchange Commission, the New York Stock Exchange Board and the Federal Reserve on corporate governance and shareholder rights matters. He was not only appointed to the Board of Hewlett Packard, but named its Chairman. Co-founder, David Batchelder, was given a seat on the board of Home Depot with just 1.3% of its common stock in February of 2007, light years before activists were targeting mega-cap companies or receiving attention, much less board seats, with such a small ownership percentage. Relational shut down its operations in 2015 after Ralph Whitworth found out that his throat cancer had returned. Ralph has done as much, if not more, for shareholder activism and corporate governance than anybody, and his absence from the activist community is certainly conspicuous, but hopefully temporary.
The specific securities identified and described herein may or may not be held at any given time by the portfolio of 13D Activist Fund, an SEC registered mutual fund managed by an affiliate of 13D Monitor.
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