Deckers Outdoor delivered a shock victory over activist investor Marcato Capital Management yesterday, announcing that its board had been re-elected in a proxy contest that has throughout proven to be one of the more surprising of the year. Although the exact votes won’t be available for another few days, the lessons from this fight could prove to be some of the most valuable going into 2018.
For activists, the clearest lesson is that full-slate or even majority-slate contests should be reserved for only the most egregious boards (Darden Restaurants) or binary choices with clear outcomes (see Broadcom’s nominations at Qualcomm). In Marcato’s case, the threat became an albatross when Deckers concluded a strategic review without a sale. The activist cut its slate by two-thirds after proxy advisers Institutional Shareholder Services (ISS) and Glass Lewis warned of the instability that could be caused by a full takeover of the board.
That tactical switch, just a week before the meeting, may have been too late. Whether it confused or biased investors is not known, but at the very least it meant that, for much of the fight, a higher bar was expected of Marcato.
As the initial ISS report noted, “In the case of a business that generates strong cash flow and is expected to remain a going concern, a plan to increase leverage and/or run a sale process is no substitute for a well-explicated, sufficiently-detailed strategic plan to begin achieving durable economic value improvements that will drive long-term value.”
One of the more obvious themes this year has been that activists are being held to a rigorous standard over their plans for running companies – witness the depth of presentations on Arconic, Procter & Gamble, and Automatic Data Processing. As evidenced by the Deckers fight, activists can pick a company in need of change or a clearer strategic direction but be let down by the thoroughness of their plan for righting the target. Despite the extent of the skirmishes over legal inhibitions to an activist victory or the sincerity of settlement talks, these eventually took a back seat. In an encouraging sign, operational arguments stood out.
For Deckers, the reversal of a torrid three years starting in January 2014, during which it lost as much as 55% of its market capitalization, clearly helped. The day Marcato first disclosed it was buying shares, the stock opened at $45. On the day of the fight, it opened at $78 (falling slightly on the outcome of the vote).
Marcato’s Mick McGuire says he still believes further steps are required for Deckers to avoid the mistakes of the past and takes credit for the uplift. Far from being passive, however, Deckers waged a substantial response. Over the course of the campaign, it cut former CEO and Chairman Angel Martinez from its board, agreed to add at least two directors next year, set new profit targets and announced that it would repurchase approximately 20% of its market capitalization, providing a solid floor under the stock.
Late or reactive as those changes may have been, the 11-month campaign provided plenty of opportunities for management to set out its strategy, while CEO David Powers could argue that he was beginning to put his stamp on things in just his second year in the top job.
“If institutions are comfortable management and the board are listening to shareholders and moving in the right direction, they’re less willing to go with dissidents,” Chris Teets of Red Mountain Capital Management, the activist that first targeted Deckers and is still in the stock, told me yesterday.
With a solid return under its belt, Marcato might well take the opportunity to move on. It has had a peculiar year, winning one proxy fight with a slightly underwhelming return and losing another with what looks like a healthy profit. Deckers will be under pressure to stick to its targets, and to further reduce its retail footprint if it cannot demonstrate stores’ value.
Article by Activist Insight