Feeds:
Posts
Comments

Archive for the ‘Activist Investors’ Category

This issue of Barron’s carries a brief article on activist hedge funds and makes mention of activist Jeff Ubben and his firm ValueAct Capital, which is regarded as one of the elite activist funds because it has averaged gains of 144 percent in companies where they filed 13D forms.

Some notable holdings include:

  • ADOBE SYSTEMS INC
  • CBRE GROUP INC
  • MCGRAW HILL
  • MICROS SYSTEMS INC
  • MICROSOFT CORP
  • MOTOROLA SOLUTIONS INC
  • MSCI INC
  • VALEANT PHARMACEUTICALS INTL

You can see a list of their most recent holdings here.

Ubben is speaking at the 9th Annual New York Value Investing Congress taking place September 16 & 17, 2013 at Jazz at Lincoln Center’s Fredrick P. Rose Hall.

Ubben will be accompanied by some of the world’s most accomplished investors, and for good reason: they want to be the first to hear investment ideas from money managers who have a proven track record of generating stellar returns for their clients and themselves.

Readers of Greenbackd can save $1,700 by registering now with discount code N13GB2 before Thursday, June 27th.

About these ads

Read Full Post »

There are good reasons for tracking activists. For one, research supports the view that stocks the subject of activist campaigns can generate significant above market returns, on the filing and, importantly, in the subsequent year. Recent industry research by Ken Squire, manager of the 13D Activist mutual fund (DDDAX), finds an average outperformance of 16% over the subsequent 15 months for companies larger than $1 billion in market cap:

Ken Squire is founder and principal of 13D Monitor, a research service that tracks activist investing and has data on Icahn-led activist situations since 1994, when the investor targeted Samsonite Corp. The average return of the 85 positions since then was 18.7% (measured until he closed the position, if at all), compared to 12.7% for the Standard & Poor’s 500 over comparable time frames.

Yet this impressive-seeming average outperformance should be viewed in the context of a general tendency of stocks to outperform once they have attracted the intense interest of known activist investors. In other words, this doesn’t apply to Icahn alone.

Squire calculates that, following a 13D filing, the shares of companies larger than $1 billion in market value have historically outperformed the S&P 500 by an average of 16 percentage points over the subsequent 15 months. A separate study of nearly 300 activist actions by hedge funds between April 2006 and September 2012 found a similarly strong record of success. Squire runs the relatively new (and so-far small) 13D Activist mutual fund (DDDAX), which chooses stocks from among ongoing activist situations and beat the S&P 500 by 5.27% in 2012, after fees.

Squire takes into account the past record of specific activist investors when considering fund holdings. Hedge fund JANA Partners, for example, has a strong success rate in its arm-twisting maneuvers on corporate executives it deems lacking. One of its prominent targets currently is Canadian fertilizer giant Agrium Inc. (AGU).

Squire’s research accords with earlier studies on this site, most notably these two:

  1. In Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors, April Klein and Emanuel Zur examined recent “confrontational activism campaigns” by “entrepreneurial shareholder activists” and concluded that such strategies generate “significantly positive market reaction for the target firm around the initial Schedule 13D filing date” and “significantly positive returns over the subsequent year.” The authors find that the filing of a 13D notice by an activist hedge fund is a catalytic event for a firm that heralds substantial positive returns in the stock. Klien and Zur found that “hedge fund targets earn 10.2% average abnormal stock returns during the period surrounding the initial Schedule 13D. Other activist targets experience a significantly positive average abnormal return of 5.1% around the SEC filing window. These findings suggest that, on average, the market believes activism creates shareholder value. … Furthermore, our target abnormal returns do not dissipate in the 1-year period following the initial Schedule 13D. Instead, hedge fund targets earn an additional 11.4% abnormal return during the subsequent year, and other activist targets realize a 17.8% abnormal return over the year following the activists’ interventions.”
  2. In Hedge Fund Activism, Corporate Governance, and Firm Performance, authors Brav, Jiang, Thomas and Partnoy found that the “market reacts favorably to hedge fund activism, as the abnormal return upon announcement of potential activism is in the range of [7%] seven percent, with no return reversal during the subsequent year.” Further, the paper “provides important new evidence on the mechanisms and effects of informed shareholder monitoring.”

h/t @reformedbroker

Read Full Post »

Update: See Ryan’s interview on Bloomberg.

Great article from Businessweek about Ryan Morris, the 28-year-old Canadian managing partner of Meson Capital Partners, LLC who “resembles a sandy-haired Mitt Romney,” and seems to be all out of bubblegum:

Ryan Morris spent a week steeling himself for the showdown. Then 27 years old, he was in his first campaign as an activist investor, trying to wrest control of a small company named InfuSystem (INFU), which provides and services pumps used in chemotherapy. In the meeting, Morris would confront InfuSystem’s chairman and vice chairman, two men in their 40s, and tell them that as a shareholder, he thought the company was heading in the wrong direction.

Morris is competitive—his high school rowing teammates nicknamed him “Cyborg,” and he took a semester off college to race as a semi-pro cyclist—but face-to-face confrontation wasn’t something he relished. “I like the thrill of the hunt, but not the kill,” he says. To prepare, Morris outlined questions, guessed potential responses, and tried to anticipate what tense “pregnant moments” could arrive. He built his clout by lining up support from InfuSystem’s largest shareholder as well as a veteran activist investor. Morris knew his own looks—he resembles a sandy-haired Mitt Romney—could help mask his youth, and decided he’d wear a tie, much as he hates to.

The company, with just $47 million in revenue, was spending too much money, and in the wrong places. In the previous year, InfuSystem’s board and CEO earned more than $11 million combined. This was for a company whose stock had lost 40 percent of its value over the previous three years. Morris figured that as a shareholder voice on the board, he could help cut expenses—including the high pay—and, once it was clean enough to sell, reap a return for his own small hedge fund.

On Dec. 13, 2011, he finally sat at a conference table across from the two directors. After 45 minutes of discussion, he still didn’t think his concerns were being acknowledged. So he got to the point: He wanted three board seats.

It’s a great story. Read the rest of the article on Businessweek.

Read Full Post »

New research co-authored by London Business School’s Elroy Dimson suggests that investors who actively engage with the companies they own to improve governance and strategy outperform more passive rivals.

The paper, Active Ownership with Oguzhan Karakas and Xi Li, focuses on corporate social responsibility engagements on environmental, social and governance issues.

The authors find average one-year abnormal return after initial engagement is 1.8%, with 4.4% for successful engagements whereas there is no market reaction to unsuccessful ones. The positive abnormal returns are most pronounced for engagements on the themes of corporate governance and climate change:

We find that reputational concerns and higher capacity to implement corporate social responsibility changes increase the likelihood of a firm being engaged and being successful in achieving the engagement objectives. Target firms experience improvements in operating performance, profitability, efficiency, and governance indices after successful engagements.

Figure 1 from the paper shows cumulative abnormal returns around corporate social responsibility engagements (click to enlarge):

Returns to CSR Activism

Dimson is perhaps best known for his global equity premia research (for example, Triumph of the Optimists and Equity Premia Around the World) with LBS colleagues Paul Marsh and Mike Staunton.

A version of the paper can be found on SSRN here.

Via Financial News’ Studies reveal the value of activism.

Read Full Post »

What do requests for confidentiality reveal about hedge fund portfolio holdings? In Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide, a paper to be published in the upcoming Journal of Finance (or see a February 2012 version on the SSRN), authors Vikas Agarwal, Wei Jiang, Yuehua Tang, and Baozhong Yang ask whether confidential holdings exhibit superior performance to holdings disclosed on a 13F in the ordinary course.

Institutional investment managers must disclose their quarterly portfolio holdings in a Form 13F. The 13(f) rule allows the SEC to delay disclosure that is “necessary or appropriate in the public interest or for the protection of investors.” When filers request confidential treatment for certain holdings, they may omit those holdings off their Form 13F. After the confidentiality period expires, the filer must reveal the holdings by filing an amendment to the original Form 13F.

Confidential treatment allows hedge funds to accumulate larger positions in stocks, and to spread the trades over a longer period of time. Funds request confidentiality where timely disclosure of portfolio holdings may reveal information about proprietary investment strategies that other investors can free-ride on without incurring the costs of research. The Form 13F filings of investors with the best track records are followed by many investors. Warren Buffett’s new holdings are so closely followed that he regularly requests confidential treatment on his larger investments.

Hedge funds seek confidentiality more frequently than other institutional investors. They constitute about 30 percent of all institutions, but account for 56 percent of all the confidential filings. Hedge funds on average relegate about one-third of their total portfolio values into confidentiality, while the same figure is one-fifth for investment companies/advisors and one-tenth for banks and insurance companies.

The authors make three important findings:

  1. Hedge funds with characteristics associated with more active portfolio management, such as those managing large and concentrated portfolios, and adopting non-standard investment strategies (i.e., higher idiosyncratic risk), are more likely to request confidentiality.
  2. The confidential holdings are more likely to consist of stocks associated with information-sensitive events such as mergers and acquisitions, and stocks subject to greater information asymmetry, i.e., those with smaller market capitalization and fewer analysts following.
  3. Confidential holdings of hedge funds exhibit significantly higher abnormal performance compared to their original holdings for different horizons ranging from 2 months to 12 months. For example, the difference over the 12-month horizon ranges from 5.2% to 7.5% on an annualized basis.

Read a February 2012 version on the SSRN.

Read Full Post »

Forbes has a great article on Carl Icahn’s activist campaign at Oshkosh Corporation(NYSE:OSK) called Is Icahn Trying To Nickel And Dime Oshkosh? Sum Of The Parts Worth Way More, BofA Says. Icahn, who, according to the article, holds 9.5 percent of the outstanding stock, is pushing to takeover the company and possible split it up. Icahn has offered $32.50 per share for the stock he doesn’t own. Bank of America’s analysts argue that the value of OSK is between $35 and $38 per share:

Their view, they noted, is supported by the average price target analysts have on the stock, which is approximately $32. Data from Thomson One shows that out of the 14 analysts that cover Oshkosh, 8 have a “buy” or “strong buy” for the stock, with a mean price target of $32.91 and a median of $34.

That valuation excludes a change of control premium, which Bank of America estimates should be between 20% and 30% over their estimate. That would take their sum of the parts valuation to between $42 to $49 per share. “While we believe that it would be very hard to get a bidder without significant synergies at levels greater than $42/share, the current offer of $32.50 while representing a 21% premium to closing price on October 11, 2012 [sic] seems indeed too low,” they added.

Read the article.

Read Full Post »

I’ve been closely following on Greenbackd the Kinnaras stoush with the board of Media General Inc (NYSE:MEG) over the last few months.

Kinnaras has been pushing the Board to “take advantage of the robust M&A market for both newspaper and broadcast television and to sell all operating units of MEG in order to retire existing corporate and pension debt and achieve a share price shareholders have rarely seen in recent years.”

It looks like Kinnaras has succeeded, with the board announcing recently that it had reached an agreement to sell its newspaper division, excluding the Tampa Tribune, to Warren Buffett’s BH Media Group for $142 million. In addition, Buffett would also provide MEG with a new Term Loan and revolver in exchange for roughly 20 percent of additional equity.

MEG is a provider of local news in small and mid-size communities throughout the Southeastern United States. It owns three metropolitan and 20 community newspapers and 18 network-affiliated broadcast television stations Virginia/Tennessee, Florida, Mid-South, North Carolina, and Ohio/Rhode Island.

Kinnaras’s Managing Member Amit Chokshi has a new post analyzing the sale and the valuation of the remaining rump of $MEG. Chokshi sees the valuation as follows (against a prevailing share price of $3.50):

A 6.8x multiple would imply a valuation of about $8.50/share when using my estimates for how MEG’s capitalization will look post the BH Media transaction and accounting for BH Media’s warrants. By year-end, it is possible that another $10-20MM in debt is reduced which would bring share value up close to $1. The reason the jump is so significant is because each dollar of cash flow erases some very expensive debt. In addition, pure-play broadcasters are valued from 6-9x EV/EBITDA and one could argue that MEG deserves a valuation closer towards the mid point or higher for its peers when factoring the disposal of newspapers and accounting for the high quality locations of its key stations.

Lastly, as I’ve repeated in each prior post, another potential value creation event would be selling off the entire company. BH Media will now occupy a Board seat and I don’t expect the blind subservience other Board members have. Management has demonstrated a clear lack of competence in every facet of managing MEG. The only thing they have done thus far is get lucky in terms of finding a buyer for their assets and providing them financing. As an owner of MEG, BH Media will get an up close look at the type of management this team brings and I suspect will compare the value management adds or detracts. To any sane observer, management is just pitiful and MEG’s value suffers for it.

Read the full post here.

No position.

Read Full Post »

This week I’ve been taking a look at Aswath Damodaran’s paper “Value Investing: Investing for Grown Ups?” in which he asks, “If value investing works, why do value investors underperform?”

Damodaran divides the value world into three groups:

  1. The Passive Screeners,” – “The Graham approach to value investing is a screening approach, where investors adhere to strict screens… and pick stocks that pass those screens.”
  2. The Contrarian Value Investors,” – “In this manifestation of value investing, you begin with the belief that stocks that are beaten down because of the perception that they are poor investments (because of poor investments, default risk or bad management) tend to get punished too much by markets just as stocks that are viewed as good investments get pushed up too much.”
  3. Activist value investors,” – “The strategies used by …[activist value investors] are diverse, and will reflect why the firm is undervalued in the first place. If a business has investments in poor performing assets or businesses, shutting down, divesting or spinning off these assets will create value for its investors. When a firm is being far too conservative in its use of debt, you may push for a recapitalization (where the firm borrows money and buys back stock). Investing in a firm that could be worth more to someone else because of synergy, you may push for it to become the target of an acquisition. When a company’s value is weighed down because it is perceived as having too much cash, you may demand higher dividends or stock buybacks. In each of these scenarios, you may have to confront incumbent managers who are reluctant to make these changes. In fact, if your concerns are broadly about management competence, you may even push for a change in the top management of the firm.”

We looked at Damodaran’s passive screeners Tuesday, the contrarian value investors Wednesday, and today we’ll take a look at the activists.

The Activist Value Investors

Damodaran cites the well-known Brav, Jiang and Kim article that I have discussed here before:

If activist investors hope to generate their returns from changing the way companies are run, they should target poorly managed companies for their campaigns. Institutional and individual activists do seem to focus on poorly managed companies, targeting companies that are less profitable and have delivered lower returns than their peer group. Hedge fund activists seem to focus their attention on a different group. A study of 888 campaigns mounted by activist hedge funds between 2001 and 2005 finds that the typical target companies are small to mid cap companies, have above average market liquidity, trade at low price to book value ratios, are profitable with solid cash flows and pay their CEOs more than other companies in their peer group. Thus, they are more likely to be under valued companies than poorly managed. A paper that examines hedge fund motives behind the targeting provides more backing for this general proposition in figure 15.

As we have seen both undervalued or poorly managed stocks can generate good returns.

Damodaran says that the “market reaction to activist investors, whether they are hedge funds or individuals, is positive.” A study that looked at stock returns in targeted companies in the days around the announcement of activism showed the following results:

Damodaran points out that “the bulk of the excess return (about 5% of the total of 7%) is earned in the twenty days before the announcement and that the post-announcement drift is small.”

There is also a jump in trading volume prior to the announcement, which does interesting (and troubling) questions about trading being done before the announcements. The study also documents that the average returns around activism announcement has been drifting down over time, from 14% in 2001 to less than 4% in 2007.

Can you make money following activist investors?

Damodaran says “sort of,” if you follow:

The right activists: If the median activist hedge fund investor essentially breaks even, as the evidence suggests, a blunderbuss approach of investing in a company targeted by any activist investor is unlikely to generate value. However, if you are selective about the activist investors you follow, targeting only the most effective, and investing only in companies that they target, your odds improve.

Performance cues: To the extent that the excess returns from this strategy come from changes made at the firm to operations, capital structure, dividend policy and/or corporate governance, you should keep an eye on whether and how much change you see on each of these dimesions at the targeted firms. If the managers at these firms are able to stonewall activist investors successfully , the returns are likely to be unimpressive as well.

A hostile acquisition windfall? A study by Greenwood and Schor notes that while a strategy of buying stocks that have been targeted by activist investors generates  excess returns, almost all of those returns can be attributed to the subset of these firms that get taken over in hostile acquisitons.

Follow the right activists, and do ok, or front run them, and potentially do very well:

There is an alternate strategy worth considering, that may offer higher returns, that also draws on activist investing. You can try to identify companies that are poorly managed and run, and thus most likely to be targeted by activist investors. In effect, you are screening firms for low returns on capital, low debt ratios and large cash balances, representing screens for potential value enhancement, and ageing CEOs, corporate scandals and/or shifts in voting rights operating as screens for the management change. If you succeed, you should be able to generate higher returns when some of these firms change, either because of pressure from within (from an insider or an assertive board of directors) or from without (activist investors or a hostile acquisition).

So how do we mess it up?

• This power of activist value investing usually comes from having the capital to buy significant stakes in poorly managed firms and using these large stockholder positions to induce management to change their behavior. Managers are unlikely to listen to small stockholders, no matter how persuasive their case may be.

• In addition to capital, though, activist value investors need to be willing to spend substantial time fighting to make themselves heard and in pushing for change. This investment in time and resources implies that an activist value investor has to pick relatively few fights and be willing to invest substantially in each fight.

• Activist value investing, by its very nature, requires a thorough understanding of target firms, since you have to know where each of these firms is failing and how you would fix these problems. Not surprisingly, activist value investors tend to choose a sector that they know really well and take positions in firms within that sector. It is clearly not a strategy that will lead to a well diversified portfolio.

• Finally, activist value investing is not for the faint hearted. Incumbent managers are unlikely to roll over and give in to your demands, no matter how reasonable you may thing them to be. They will fight, and sometimes fight dirty, to win. You have to be prepared to counter and be the target for abuse. At the same time, you have to be adept at forming coalitions with other investors in the firm since you will need their help to get managers to do your bidding. 

Read Full Post »

Kinnaras Capital Management demonstrates characteristic tenacity in a new letter to Media General Inc (NYSE:MEG) sent after Kinnaras’s exclusion from the most recent earnings call:

I intended to voice those concerns on the Q1 2012 conference call but despite following directions to join the queue, it appears that I was not allowed to participate in this call. This is a poor response to an engaged shareholder. I have likely purchased more shares of MEG than you ever have, yet as an owner of the Company I was not allowed to ask pertinent questions regarding MEG’s operational and financing strategies simply because I have accurately pointed out the various failures you have helmed while at Media General.

In its two earlier lettera Kinnaras expressed frustration with the performance of MEG, and urged the Board to “take advantage of the robust M&A market for both newspaper and broadcast television and to sell all operating units of MEG in order to retire existing corporate and pension debt and achieve a share price shareholders have rarely seen in recent years.”

MEG is a provider of local news in small and mid-size communities throughout the Southeastern United States. It owns three metropolitan and 20 community newspapers and 18 network-affiliated broadcast television stations Virginia/Tennessee, Florida, Mid-South, North Carolina, and Ohio/Rhode Island.

The initial letter included Kinnaras’s sum-of-the-parts valuation, which Kinnaras Managing Member Amit Chokshi sees at $9.75 per share against a prevailing price of around $4.60.

Here’s the new letter:

Kinnaras also has on its website its recommendations to MEG shareholders ahead of the proxy vote.

No position.

Read Full Post »

Kinnaras Capital Management has sent a follow up letter to Media General Inc (NYSE:MEG) requesting the board “selloff MEG in its entirety and divorce this company from the inept management team currently at the helm.”

In its earlier letter Kinnaras expressed frustration with the performance of MEG, and urged the Board to “take advantage of the robust M&A market for both newspaper and broadcast television and to sell all operating units of MEG in order to retire existing corporate and pension debt and achieve a share price shareholders have rarely seen in recent years.”

MEG is a provider of local news in small and mid-size communities throughout the Southeastern United States. It owns three metropolitan and 20 community newspapers and 18 network-affiliated broadcast television stations Virginia/Tennessee, Florida, Mid-South, North Carolina, and Ohio/Rhode Island.

The initial letter included Kinnaras’s sum-of-the-parts valuation, which Kinnaras Managing Member Amit Chokshi sees at $9.75 per share against a prevailing price of around $4.60.

Here’s the follow up letter:

Kinnaras also has on its website its recommendations to MEG shareholders ahead of the proxy vote.

No position.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 4,359 other followers

%d bloggers like this: