This year’s corporate Hunger Games (read: proxy battles) are around the corner, says the March 2014 issue of Activism Monthly, observing that a number of nomination deadlines are drawing closer by the day.
“The annual meeting season provides the most comprehensive and in some cases the only opportunity for shareholders to exert their influence on a company,” observes Activist Insight Editor Josh Black.
Be prepared, he warns, for a flurry of solicitations and nomination letters being filed by activist investors during the months from March through June, often dubbed as America’s season for proxy wars.
ValueWalk's Raul Panganiban interviews Kirk Du Plessis, Founder and CEO of Option Alpha, and discuss Option Alpha and his general approach to investing. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with Option Alpha's Kirk Du Plessis
Fertile ground, it seems, for opportunities to make money!
Activist Investor: The importance of board seats
First out, understand the significance of a proxy war.
Securing representation on a target company’s board is of paramount importance to activist investors, instantly validating their stand on the company’s shortcomings.
Also, “activists seek board seats more than any other objective, largely because they can provide the pathway to change more straightforwardly than any other means,” says the article.
Activists may therefore use board positions to implement operational improvements and to provide their own practical expertise to drive change at the company. Other activists may use proxy battles to publicize their grievances with the company and its management or governance.
As per recent statistics, activist investors’ win rate on board seats is at the highest level in 13 years.
How to drive your own agenda in a proxy battle: the activist investor’s track record
According to Activist Investor, investors seeking to make money out of a proxy battle can use its unique Follower Returns feature to navigate through the process.
The starting point is to know your activist investor and the track record of success of the strategies employed. The higher the activist’s Average Annualized Follower Return, the better the chances of earning a profit on your investment.
Read more about how the leading activists tracked in 2013 here.
Activist Investor: Select the right industry
Look for opportunities in sectors such as technology, healthcare and basic materials which appear to generate higher Annualized Follower Returns, says Activist Investor, and as shown below:
Next: Analyze the company’s stance
What will it be: Surrender, battle stations or something in between?
“Our research has consistently shown that companies are best served by finding common ground with activist investors,” says the magazine. Not surprisingly, this approach from companies has led to Average Annualized Returns of 58% since 2010.
If the company strikes back, such as with a poison pill, expect lower returns – on average 37%.
Lastly, if the company capitulates in full, returns are the lowest at 29%.
Fourth: How the battle went
You needn’t close out your investment once the proxy war is over. In fact, going by past history, investors can look forward to a second ‘pop’ in the targeted stock roughly nine months after the initial disclosure by the activist.
During this period the outcome of the proxy contest has an important bearing on returns as shown by Activist Investor in the following graphic.
Again, the compromise route would probably earn you the best profit on your investment.
Support the above steps with basic fundamental analysis, and remember that you may be entering the stock at a price much higher than the activist whose coattails you are riding.
Ready to go?
Hone your activist investing skills on these recently notified activist investments during February. The list shows the company, the activist and the latter’s stake in the company in that order.
Dresser-Rand Group Inc. (NYSE:DRC) – ValueAct Capital – 6.6%
URS Corp (NYSE:URS) – JANA Partners – 9.7%
Simplicity Bancorp Inc (NASDAQ:SMPL) – Clover Partners – 5.7%
Bwin.party Digital Entertainment Plc (LON:BPTY) – SpringOwl Asset Management – 6.1%
Vitacost.com, Inc. (NASDAQ:VITC) – Consac – 7.4%
LNB Bancorp Inc (NASDAQ:LNBB) – Ancora Advisors – 5.7%
Joe’s Jeans Inc (NASDAQ:JOEZ) – Mill Road Capital – 5.1%
Carbonite Inc (NASDAQ:CARB) – Discovery Group – 5.9%
RealD (NYSE:RLD) – Altai Capital Management – 5.9%
CONMED Corporation (NASDAQ:CNMD) – Coppersmith Capital – 6.0%
Yahoo! Inc. (NASDAQ:YHOO) – CtW Investment Group – 0.2%
INNVEST REIT TRUST UNITS (TSE:INN.UN) – Orange Capital – 10.3%