News Column

Activist investors look to make high gains under a low profile

June 3, 2014

By Marni Usheroff, The Orange County Register

June 03--Activist investors have garnered plenty of attention lately with the likes of Bill Ackman publicly partnering with Valeant Pharmaceuticals in an attempted hostile takeover of Allergan, and Carl Icahn tweeting about his stake in Apple.

Some see today's activist investors as heirs to Wall Street's corporate raiders of the 1980s. Others argue they provide much needed oversight for companies whose boards aren't doing their jobs.

But not all activist shareholders are media rock stars telegraphing their every move to the public. Some prefer to work behind the scenes.

Legion Partners Asset Management would characterize itself as the latter. The Beverly Hills-based investment firm focuses on small- and mid-cap companies and recently launched a fund seeded by $200 million from the California State Teachers' Retirement System with a long-term mandate.

Cofounders Christopher Kiper, Bradley Vizi and Ted White recently spoke with the Register about activist investing.

Q. What is shareholder activism?

A. Christopher Kiper: Generally shareholder activism for us is involved with going out and doing deep research and really trying to find good companies that are undervalued. We're trying to figure out the reason why and see what we can do, utilizing the tools we have at our disposal, to make the shares become more fully and fairly valued. That work can take on a number of different steps. That could be capital allocation, a change in leadership. It could be that they need to go in a different direction, potentially sell the business.

A. Ted White: Over time our capital markets have just morphed to a way that the shareholder base is really fragmented and dispersed. A significant holder like a mutual fund is 5 percent of a company on average, still pretty significant holders, but look at how they're structured. Their business is to aggregate funds from individual investors and to invest those. They aren't really in the traditional sense owners of a business. The elements that are missing is that interest of somebody that truly owns something and feels that responsibility and is going to be involved.

Q. What are the tactics you can use in order to effect change?

A. Kiper: We seek to change the things about the company that are leading to its undervaluation. And those vary for every single company.

A. Bradley Vizi: We start out very reasonable. We'll show up with pages and pages of presentation and data backing up our suggestions and try and have a productive discussion with the leadership, starting with the management team and then graduating to the board of directors (if necessary). If we're unable to be successful, there's a process that you start to get other shareholders involved. Eventually it could escalate to a proxy fight, which would be a bit more contentious. And when the proxy fight begins it's a multiweek, multimonth process. There are multiple steps along the way in which you can settle or you can see it through to a vote.

Q. One criticism of activist investors is they focus on short-term profits at the expense of long-term gains. What would you say about that?

A. Kiper: I can't speak for all activists, but I can tell you from where we're at. Our largest investor is CalSTRS. And one of the things that they're very interested in, because they're going to be invested in the U.S. equity markets for literally decades, is to see companies run in a way that's sustainably better for well into the future. We're not targeting a short-term pop in the stock. We're targeting longer term things that will structurally make the business a better business for shareholders. On the governance front -- de-staggering the board so that all the directors stand for election every year, implementing majority votes. We're not talking about how do we make the stock go up 25 percent so that we can sell and make money and move on.

Q. Some activists like to embrace the media and broadcast what they're doing on social media, like Carl Icahn tweeting about Apple. How do you think this has affected shareholder activism?

A. Kiper: I think there's certainly a bunch of celebrity activists who seem to like that position in the media. That's not how we have tended to operate. I think typically what you'd see out of us and what we'd like to do is have a private dialogue. Because what we have found in the past if there's a bunch of public comments, generally it tends to get both sides sort of riled up and it makes it more difficult to come to a consensus about the best way to move things forward.

Q. If it makes it more difficult to come to a consensus, why would people want to do that?

A. Kiper: I think potentially maybe what you're seeing is activists taking on activist stakes in larger companies with very, very small percentages of ownership. And maybe they feel like embracing the media is a way to rally the shareholders around the position and bring more pressure to bear. I think there are a lot of public personalities that are out there who seem to like the attention, and quite frankly, it probably may be pretty good in a lot of situations for fundraising.

A. Vizi: You're also seeing activists getting increasingly creative, particularly when you get into bigger companies. As a fund starts to get to the $10 billion range, the universe of potential targets is much, much smaller. So naturally when you have a handful of activist funds fishing in ponds that are a lot smaller, I think you tend to see an increased level of creativity.

A. White: When there are hundreds if not thousands of shareholders, one of the ways you facilitate a debate about value or something going on with the company is through the use of media. It has a really quite legitimate and very powerful role to play in that...sometimes (the exposure) is a little too much. Sometimes the stories get deeper into personal battles and personalities than they do into the real nub of the issue at a particular company, frankly because sometimes the personality conflicts are a lot more sexy than just the nitty-gritty about how a business could be run better.

Q. There's been so much more attention being paid to activist investors lately in the last two years or so. Are we returning to a 1980s Barbarians at the Gate type mentality?

A. White: Activism may be getting defined a little too much by the tip of the iceberg. And by that, what I mean is, you have some high-profile cases you know, a relatively small number, but they get an awful lot of attention, and people start to view activism by some of the examples that they hear. But for the most part the majority of the companies that are engaged by activists probably stay behind the scenes.

A. Vizi: A lot of the critics like to tie what we do and activism today back to kind of the corporate raiders of the 1980s. And they try to paint a stigma around it, and that just isn't accurate at all. I think the reality is we're perfectly aligned with other shareholders. We make money, we generate returns and we get paid the same way other shareholders do.

Q. Did the recession play a role in people being more vocal?

A. White: I've noticed over the years as you have these periods, the crises in the markets, there actually is an increased level of receptivity to activism following those events.

A. Vizi: Coming out of the downturn, when people lose money there's a higher level of scrutiny on the things that are being done at companies. As the economy starts to mature and become kind of slower growth generally, I think that's the type of environment that an activist strategy will flourish in. Because at the end of the day perhaps the biggest tool in our tool belt is essentially our active involvement. In other words, we don't rely on the market to go up in order to generate returns.

A. White: In raging bull markets it's really hard to get people to think rationally about governance structures. It's just the way people are, unfortunately. Markets are doing so well who wants to rock the boat, right?

Q. What Bill Ackman has done with Herbalife, attacking the very nature of their business, does using a tactic like that pose a big risk to the activist investor themselves?

A. Kiper: It's not even the kind of activity that we engage in. If you sort of think about that, going short a stock, and then publicly making a case about why the business was a fraud and then it just going out of business, that's just not what we do...and I would say more broadly I don't see that many activists engaging in that exact behavior.

Q. Ackman is working with Valeant to encourage Allergan to be acquired by Valeant. Is that an unusual move for an activist investor?

A. White: Some of the big institutions, look at like the Canadian funds, are pretty active investors They're not real public about it, but there's some cases where they are involved in some publicity, replacing some board members and things like that. They're coming in as an active owner or just a big source of capital working with companies to either cause some mergers, providing some capital for acquisition or growth or things like that. It's not unheard of to have investors doing that.

Contact the writer: musheroff@ocreegister.com or 714-796-7920

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(c)2014 The Orange County Register (Santa Ana, Calif.)

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Source: Orange County Register (CA)


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