The next generation of shareholder activists
In the hedge fund world, Julian Robertson’s Tiger Management spawned the Tiger Cubs, successors trained by the Old Guard who adopted their own distinctive style. Much the same is happening in shareholder activism, where investors who cut their teeth with the likes of Carl Icahn, Third Point’s Dan Loeb, Pershing Square’s Bill Ackman and Ralph Whitworth of Relational Investors are setting up their own shops.
Over the past few years, Icahn protégés Keith Meister and Alexander Denner founded activist funds Corvex and Sarissa Capital, respectively, while Mick McGuire, formerly of Pershing Square, started Marcato Capital. Glenn Welling left Relational Investors to launch Engaged Capital and Arnaud Ajdler of Crescendo Partners founded Engine Capital.
Others, like Greg Taxin, president of the Clinton Group, and Stephen Griggs, CEO of Smoothwater Capital, distinguished themselves in the corporate governance arena before starting activist funds.
This new generation of activists is gaining prominence as traditional takeovers wane. ‘We’re seeing less M&A and more activism,’ says Matthew Sherman, president of Joele Frank. ‘In many instances, activism is almost a new form of hostile M&A on the cheap.’ Rather than settling for a single board seat, activists today have more bravado, he says, and some are trying to wrest control of the board without owning massive positions.
Taxin observes that ‘a decade ago, shareholder activism was a little bit of the Wild West with some maverick personalities and a gun-slinging mentality. Those involved today have been investing with this style of active engagement for longer and have developed professionalized approaches.’
Here, then, is IR Magazine’s field guide to the new guard in shareholder activism, identifying a few people whom today’s IROs would be wise to keep in their sights.
Glenn Welling, founder and CIO, Engaged Capital
It’s been two and a half years since Welling left Relational Investors to launch Engaged Capital, a move he sees as the next logical step in a 20-year career focused on ‘helping firms figure out how to raise their stock prices. I refer to us as private equity investors in public equities. We don’t buy control positions – we take positions of influence.’
Glenn Welling, Engaged Capital
We don’t buy control positions – we take positions of influence
Take Engaged’s recent campaign at AeroVironment, the largest supplier of unmanned aircraft – or drones – to the US Department of Defense. Welling was intrigued because AeroVironment was the leader in its space, but its stock price seemed depressed. The company had no debt and 50 percent of its $500 mn market cap was sitting on the balance sheet.
Welling emphasizes that before Engaged buys a stake in a firm, it needs a concrete agenda for improving valuation. At AeroVironment, he saw a very inefficient capital structure and not enough transparency – reasons why the stock was trading at $18 when it should have been somewhere in the low-to-mid $30s.
Welling would still like to see the company deploy capital in a more ‘shareholder-friendly way’, but AeroVironment has improved its transparency, allowing analysts and other investors to better assess the stock. Since July 2013, the share price has jumped to $40.
Engaged focuses on companies with market caps in the $500 mn to $8 bn range because these are not widely followed by analysts. ‘Eighty percent of the time we work behind the scenes with management and the board to effect change,’ says Welling, who views shareholder activists as akin to unpaid consultants heavily vested in the outcome for these firms. ‘For us, it’s a rare situation where we have to file a 13D and use public means to drive change.’
Matthew Peltz, partner and senior member of the investment research team, Trian Fund Management
As the son of Nelson Peltz, founder of Trian Fund Management, an approximately $8 bn activist hedge fund, Matthew Peltz began studying business strategy while still in high school: ‘By the time I was 14, I was reading annual reports of companies to try to understand how a business worked.’
Matthew Peltz, Trian Fund Management
Activists have a lot of good ideas and care about the long term
Peltz joined Goldman Sachs the day after his graduation from Yale, and spent the next two years there in the consumer retail group and at Liberty Harbor, an affiliated multi-strategy hedge fund. He enjoyed a front-row seat for several LBOs in the days before the financial crisis hit, and observes that ‘all these smart, private equity guys were paying the highest price, using the most leverage, to buy good assets but not world-class companies.’
In January 2008 he joined Trian and now sits on the board at Arby’s. What sets Trian apart from other activist funds, says Peltz, is its focus on operations and the income statements at such firms as DuPont and PepsiCo. ‘We hope to get in there and work with the board and management to drive sales as if we owned 100 percent of the firm,’ he explains.
‘Shareholders are much more engaged today – and I believe you’re going to see that increase in the future,’ he predicts. Before 2005 or 2006, he believes most shareholders felt they faced a choice between patiently holding on to an underperforming stock or selling. ‘Today, shareholders realize activism can represent a very viable third alternative,’ he says.
Peltz also maintains that CEOs, CFOs and IROs are rethinking their assumptions about activists. ‘Some of the smarter management teams realize they should be engaging because activists have a lot of good ideas and care about the long-term outcome,’ he concludes. ‘I believe activist funds are here to stay.’
Greg Taxin, president, Clinton Group
IROs used to fear Taxin, a Harvard-trained lawyer, former investment banker and co-founder of Glass Lewis, because of the power the proxy adviser wielded among institutional investors casting proxy votes. Today, he enjoys a new type of influence at the firms he’s targeted for activist campaigns. In 2009 Taxin joined the Clinton Group, which manages $1.5 bn in assets across several different strategies, including shareholder activism.
Greg Taxin, Clinton Group
Becoming a shareholder activist after the sale of Glass Lewis was ‘a natural evolution’
Taxin describes becoming a shareholder activist, after Glass Lewis was sold to the Ontario Teachers’ Pension Plan, as ‘a natural evolution’. In his new role, he gets to test the proposition that governance and compensation practices affect company performance. In his five years at the Clinton Group, he has been involved in 41 activist campaigns, typically targeting companies in the $200 mn to $4 bn range.
Red Robin Gourmet Burgers is a good example of the type of activist campaign Taxin has led. He went to the board and provided what he believes was objective evidence that the business began to suffer after a new CEO came on board (the stock price plummeted from $48 per share to $16). Soon after, the board fired the CEO and added four new directors, replacing two sitting ones.
Typically, Taxin doesn’t put himself or his colleagues on boards as he prefers directors with industry expertise. Red Robin had only one director with restaurant experience but now has several. The board hired a new CEO, who turned around the economics at existing restaurants and opened new ones. Today, the stock is at $71.
Arnaud Ajdler, managing partner, Engine Capital
Ajdler came to the US in 1998 to complete a master’s degree in aeronautics at MIT. ‘I fell in love with value investing and Warren Buffet, and went to Harvard Business School,’ says Ajdler, who received his MBA in 2003. He then joined Crescendo Partners, where he worked with CEO Eric Rosenfeld on a number of proxy fights.
Arnaud Ajdler, Engine Capital
Ten years ago, institutional shareholders were not supportive of activists, but that has changed
In 2013 he founded Engine Capital. ‘When I left Crescendo, I told Eric, Look, if I don’t do it now, I’m never going to do it and I will always regret it,’ he says. ‘It was my dream to eventually have my own fund.’ Engine, which has nearly $125 mn in assets under management, is a special-situations fund that uses activism as a tool in select situations, targeting small to mid-cap companies.
To illustrate his approach to activism, Ajdler explains that Engine owned just under 5 percent of Vitran, a company that had recently sold off two of its major divisions and owned a large amount of real estate that wasn’t being properly valued by the markets. He sent management a public letter asking the company to sell itself – and a few months later, it did. Engine also recently settled with Stewart Information Systems for two board seats, a large share repurchase and a commitment to a cost-cutting program.
‘Ten years ago, institutional shareholders were not supportive of activists, but that has radically changed,’ Ajdler explains. ‘There’s more support for activists so more activists are winning contests. As a consequence, more companies are now open to settling with activists early on. Why go through a fight, if you think you might lose?’
Stephen Griggs, CEO, Smoothwater Capital
Shareholder activists have targeted many Canadian companies but only a handful of activist funds are based in Canada. The fund started by Griggs, former executive director of the Canadian Coalition for Good Governance, is an exception.
Stephen Griggs, Smoothwater Capital
We’re much more long term in focus than a fund where managers are paid a performance fee
In April 2013 he started Toronto-based Smoothwater, a vehicle for the owners to invest their own proprietary capital. Running one’s own money creates some interesting incentives, says Griggs. ‘We’re much more long term in our focus than a fund where managers are paid a performance fee, which is time-weighted,’ he explains.
Smoothwater targets mid-cap companies with identifiable assets that can be independently valued. One example is Genesis Land Development, a TSX firm that for several years has reported a net asset value nearly twice its share-trading price. Griggs attributed the stock’s weakness to a rough patch at the firm (regulators banned Genesis’ founder from the capital markets after the company misstated financial results). He then considered whether his firm could solve some of Genesis’ problems.
Smoothwater amassed 22 percent of the shares outstanding and instigated a proxy fight during the summer of 2013. As a result, Griggs is now chair of Genesis’ board, and ‘we’re on a path to recognize the value embedded in the firm’s assets and its business.’