Activist Investors Continue To Step-Up Their Focus On Stewardship Of Corporate Assets – And On Use Of Cash

A Mega Trend Gains Steam

Way back in 2011 we predicted that this would become “The Next Big Thing” in the corporate governance movement…and boy were we on the money. The original article is on our website, www.optimizeronline.com, under “What’s New” – and it’s still very much worth a look, because in many ways, the last quarter showed an even faster and more alarming ramping up of the trends we saw emerging:

“Activist Storms Microsoft Board” an August WSJ headline screamed:

The only real surprise here – after we’d noted back in 2011 that Microsoft - a serial and big-time buyer-back of its own stock – had produced a truly pathetic total return to investors of 0.2% over the past decade – was how long it took for an activist to strike. With numerous analyses being floatedto show that a broken-up Microsoft would be worth way more than the current stock price – Microsoft quickly capitulated to Mason Morfit and his ValueAct hedge fund – that had accumulated a $2.2 billion investment, and said it was talking with other big investors about “new and better strategies.”

Microsoft promised to put a ValueAct-named director on the board…  and give Morfit regular meetings with Microsoft’s president and “selected directors and management”… “to discuss a range of business and strategic issues.”

Meanwhile, Nelson Pelz – whose Trian Fund Management fund has racked up numerous home runs for investors with basically “friendly” approaches – providing what proved to be great advice to companies like Heinz and P&G for example – has taken big positions both in Pepsi and  in recent Kraft-spinoff Mondelez. Pelz told a CNBC conference that Pepsi should acquire Mondelez for $35 - $38 a share, then dividend-out 20% of the combined market cap to shareholders in cash…before spinning off the Pepsico beverage business to shareholders. What a home run THAT would be for investors – at least in the short run.

And how can we leave out Apple? They have been an investment bonanza for long-term holders, but, nonetheless, David Einhorn attacked them earlier in the year for hoarding too much cash – as we predicted that someone would, since it was earning less than a 1% return. And he DID extract a big boost in cash payouts to investors. But Oh…Woe…Fast on his heels comes fast- buckster Carl Icahn – who wants Apple to borrow about $150 billion (!!) to fund an even bigger cash payout, and who’s been tweeting like mad, to hype the stock price so he can sell out fast.

And how could we ignore another big and related trend – to disrupt planned mergers with arguments that money is being left on the table – or that the strategy  is somehow “flawed”? – like at Dell, where the agitators proved right, but also in at least four other big deals of late, like Office Depot/OfficeMax, Softbank/Sprint, Glencore/xstrata  and  T-Mobile/MetroPCS.

One of the major “wedges” in virtually all of the deals cited above – as we also predicted earlier – is the “feet- to-fire part” – where dissidents propose a short-slate of new directors – usually targeting specific incumbents to be ousted - and threatening an outright proxy fight if the dissident groups’ demands are not met.

And lo…as we’ve also been warning for several years - it is no longer socially “questionable” to be on a dissident slate. And lo again, September brought news in the WSJ that dissidents at companies like Allscripts, Cedar Fair Entertainment, CSX, Hess, Office Depot and Tessera Technologies have been hiring executive search firms to recruit new directors who will have better CVs, higher name recognition and greater shareholder appeal than the targeted incumbents, which, often, ain’t that hard to do. Please note especially - every one of these campaigns succeeded handsomely.