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Activism Panel: Scott Ferguson (Sachem Head), Cliff Robbins, Jeff Smith
Q: Tell us a little about your firm and your process.
Ferguson: In order, we ask about a new potential activist investment:
1. The basics: what’s the company worth, where does it trade, what does it do?
2. How much leverage do I have relative to the board and management?
If not a lot of leverage, we may have to go to shareholders directly. We’ve been more successful over time when we have at least a ‘credible threat’ of compelling them to do something. If it makes sense, they’ll usually meet you halfway, at the minimum. Overall, we ask first if the business would be a good passive investment and then second we figure out how much leverage we have. If we don’t have a lot, then we’d want to be a lot more demanding in terms of “would we be content to passively invest in this business?” As far as top down concerns, we’ll flex our nets around from 40’s to 70’s but we really are just bottom up investors and focus less on top down. That being said, if we were nervous about the world economy or China it’s not like we’d be filing 13-D’s on a company like Terex.
Robbins: We take a private equity approach to public equity. I spent 20 years working at KKR and General Atlantic – with every investment, you had to start with the proposition that you’d need to pay 30-50% more than current price to acquire the company. As we all know, what you pay determines your return – so if I can own 5-10% of a company in public markets…one that I would’ve happily paid 30-50% premiums for in private markets…then that’s our sweet spot. In private equity tradition, we’re friendly investors only, unlike many activists. Management matters the most to us. Our business is pretty straight down the fairway – we invest only in North America.
Jeff Smith: We’re a little different – friendly but definitely not passive. We also need to have identified an operational plan in terms of what can improve cash flow, similar to our pitch on Darden a year ago today which has played out.
Q: Any current stock ideas or investing tips?
Ferguson: Not that this is an original idea, but we are attracted to spin-offs. Another simple but timeless tactic of ours is to read FT or WSJ articles from six months ago – you find a lot of interesting things. One current example is TeamHealth holdings. There’s been a slowdown in the sector but has started reporting better fundamentals. Under a year ago they had a buyout offer for a 60% premium which is still dangling out there. We doubt that the CEO of the acquiring company has changed his mind much – if he was interested six months ago, he’s probably still interested today. We have no visibility as to when or if it’ll happen – CEO could be playing poker here and trying to buy TeamHealth cheaper – but we don’t think things have changed that much. Having activists (in this case, JANA) on the board is also helpful in ensuring management makes decisions with shareholder interest in mind. I find it interesting that Jeff Smith avoids proxy fights when your capacity to be effective is much better than it’s ever been in the past. Most boards used to just lawyer up and get defensive and now they’re a lot more willing to listen.
Cliff: One of our ideas: XLNX – they make a special semiconductor that only two companies can. Them and then Alterra which just got acquired for 25x EBITDA by Intel. We’re happy to own this business but think there’s takeout optionality.
Ferguson: Similar to Cliff, I like businesses where it’s a decent standalone business but it’s worth a lot more to someone else. One other piece of advice – sometimes severance is the best investment you make. Paying to get rid of the CEO of CP was incredible when we were at Pershing – it was the key to the stock working – the stock was a four bagger. No one is crying about the dollar amount paid to the guy to walk out the door. Money is a great tool to effectuate things and lubricate those kind of situations. It’s much more efficient to just do it and move on.
Cliff: One other sector we see opportunity: we think bank activism is going to pick up. We have a 10% stake in USB (US Bancorp). It’s a community bank – hugely undervalued – trading at 115% of book, one of the safest investments I’ve ever seen. They have $4B in market cap and $2B of that is cash. They went thru 08 without a hitch. Our goal: let’s get this excess capital off the balance sheet. They’ve already begun returning it to shareholders and we see this continuing.
