If the reason you find activist investing thrilling is because you loved the scene in "Barbarians at the Gate" where RJR Nabisco CEO F. Ross Johnson, appalled that his company spent $350 million on less-than-felicitous smokeless cigarettes, decides to just buy the company already, then the new breed of activist investors might not be for you.
The new breed is more likely to show up with PowerPoint presentations tricked out with spreadsheets and flow charts, seeking behind-the-scenes meetings with management or fellow shareholders. They seek consensus, not conflict.
That's opposed to their elders, who like nothing better than firing off a riposte or two in regulatory filings and, if that fails, going straight for the proxy contest, or perhaps court. Instead of big activist moves, like a leveraged buyout or a sale, the new activists are likely to seek spinoffs or business separations like ITT Corp., El Paso Corp., McGraw Hill Cos. and Fortune Brands Inc. All acted because of activist involvement, something that we can expect more of in a lower-leverage, risk-averse investing climate.
Despite the lower-key approach, activism remains alive and kicking, making a comeback after 2008-2009. Through Nov. 25 there were 350 announced campaigns, according to Hedge Fund Solutions LLC, which advises clients on both sides of activist campaigns, up from 340 at the same time in 2010, says HFS founder Damien Park.
The fight over corporate governance, says Park, has shifted from the public and into the boardroom. In his firm's midyear figures, only 142 campaigns were announced, of which 27 ended in a settlement and 25 went to a shareholder vote. "In our opinion, this is a sign that both sides have become more adept at managing shareholder activism, knowing when best to concede, negotiate or fight," he says in the report.
It's true that the patriarch of takeovers, Carl Icahn, 76, hasn't lost his taste for old-style corporate combat. There was his long, drawn-out war against Lionsgate Entertainment Corp., which began with Icahn calling the board delusional over its plan to buy Metro-Goldwyn-Mayer Inc. for its film library and ended up with everyone suing. Icahn went away this summer for a $7 per share payoff, half a dollar less than his final offer. (While he didn't get his merger, he got equity in exchange for MGM debt, which he had been piling up in hopes of a deal after MGM exited a prepack bankruptcy last year.)
Icahn's brand of lay-waste-and-see-what-emerges activism wasn't the game plan followed by one of his protégés, Russell Glass. While Glass speaks warmly of his mentor, when his firm, RDG Capital LLC, founded in 2005, took a shine to computer-processing company DST Systems Inc. -- a shine not returned -- Glass didn't author a nasty letter. Instead, he organized a meeting of DST's top institutional shareholders to try to persuade them that the right course was a sale of noncore assets. While DST hasn't sold anything, it did hire Bank of America Merrill Lynch for a strategic review and expanded a share buyback program.
The term "hostile takeover," says Glass, is "an oxymoron because there can be no such thing as a hostile offer; it's hostile only to incumbent management."
That attitude is shared by Mick McGuire, who cut his teeth at William Ackman's Pershing Square Capital Management LP. McGuire's firm, San Francisco-based Marcato Capital Management LLC, was founded last year. "There's a trend in best practices for corporate governance and the emergence of firms like ISS and Proxy Governance that act as watchdogs," he says, "which has helped a lot to prevent entrenched behavior with boards ignoring reasonable proposals."
McGuire, like Ackman, looks for companies with unrelated businesses that can mean often-overlooked undervalued assets. Case in point: Alexander & Baldwin Inc., a Hawaiian container-shipping business that also owns commercial real estate and working farms. McGuire has already shared a lot of his analysis with management, as Ackman did with Target Corp., which he went after with $2 billion dedicated solely to that campaign.
On Dec. 1, Alexander & Baldwin said it would split into two separate companies -- real estate and ocean transportation -- capping McGuire's nine-month campaign with his first win. While the split is very much to McGuire's liking, Marcato had the right stuff to take on the expense of a proxy battle, as Ackman's Pershing Square was backing him with an 8% share of the two hedge funds' overall 10% stake in Alexander & Baldwin. McGuire, however, insists he was the lead on this campaign.
Still, no matter how many PowerPoints are presented to management, the response may be anything but rational. "I can't tell you how many times a client of mine received a nomination notice, and there's so much emotion attached to that, as opposed to constructive engagement," Park says.