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1
Barry H. Genkin Barry H. Genkin
SEC Hot Topics InstituteSEC Hot Topics Institute
Wednesday, September 24, 2008 Wednesday, September 24, 2008
Philadelphia, PAPhiladelphia, PA
Hedge Fund ActivismHedge Fund Activism
Page 2
Recent StatisticsRecent Statistics
• Q-1-2 (08) – Record Volume of Proxy Fights
• 265 New Activist Campaigns Announced during Q-1-2
• 57 of These Were New Proxy Fights (most in any 6 month period)
• During Q-1-2 Activists Attained Board Seats at 29 Companies
Page 3
Current TrendsCurrent Trends• Institutional investors and activists –
common goals• Greater willingness to take
aggressive positions• Stockholder focused governance as
opposed to director focused governance
• Greater stockholders demands on board of directors and management
• Shareholder activism garnering greater support in courts and marketplace
Page 4
Current Trends (Cont’d.)Current Trends (Cont’d.)• Expansion of hedge fund activism• Displaced investment bankers or
research analysts augmenting hedge funds Hedge fund joining forces –
emergence of “wolf pack” Greater press coverage Established relationships with
financial community More sophisticated strategic
approach
Page 5
Current Activist ActivitiesCurrent Activist Activities• Developments embolding activist
shareholder effective: Majority voting is becoming the norm Withhold/against vote campaigns increasing
with greater frequency Defensive provisions repealed with increased
frequency Stockholder proposals still prominent New eProxy rules will make proxy solicitations
much less expensive for dissidents
• Success breeds success – good activist track record
Page 6
Setting the TableSetting the Table
Important Definitions and Confusing Terminology
• Proxy Contest – Proposal, through use of a proxy, not supported by management
• Election Contest – Proposal, through use of a proxy, but relates to election of directors
• Consent Solicitation – Shareholder action not through proxy – no meeting, notice, or vote
• Hostile Takeover – Majority Voting Control (often used incorrectly)
Page 7
Setting the Table (Cont’d.)Setting the Table (Cont’d.)
• Scorched Earth Tactics – Throw everything, including kitchen sink
• Activist Shareholder – Voice heard – take action
• Hedge Fund – (Hedging, Arbitrage, Swap) - Now generally privately offered managed capital funds (unregulated)
• Full Slate/Short Slate – All directors/less than all
• e proxy rules - New SEC Rules re: electronic proxies
Page 8
Purposes of Proxy ContestPurposes of Proxy Contest
• Enhance Shareholder Value – Stock Undervalued
• Influence Board/Management – Take Action - “Sell”
• Gain Control (Without Buying Stock) – of BofD• No Premium to Shareholders• Quicker Timing than Other Methods – Short as
a Couple of Months (Consent Solicitation)• Lower Cost – Several Hundred Thousand• Achieve a Quick Settlement
Page 9
Legal/Regulatory FrameworkLegal/Regulatory Framework
• Articles• By-laws• State Law (Incorporation)• Change-in-Control Documents –
Employment Agreements• SEC Rules and Regulations
§13 – Schedule 13D – Filing “Group”) Derivatives – UK – Cash Settled Derivative
Positions (“CFDs”) – (i.e. Contracts for Differences)
Children's Investment Fund v CSX Corporation §14 – Proxy Rules
Page 10
Proxy Contest Team – Proxy Contest Team – Company SideCompany Side
• Insurgent/Activist/Hedge Fund• Selected Company Officers• Board of Directors (or
Committee)• Lawyers (and Local Counsel)• Investment Bankers• Investor Relations• Public Relations• Proxy Soliciting Firm
Page 11
Due Diligence on Target – Due Diligence on Target – Vulnerability AssessmentVulnerability Assessment
• Undervalued – Stock Trading• Vulnerabilities
Shareholder Action by Written Consent Advance Notice Provisions (CNET) Advance Notice Nomination Provisions
(CNET) Rights Plan (“Poison” Pill) Staggered Board Cumulative Voting
Page 12
Due Diligence on Target – Due Diligence on Target – Vulnerability Assessment Vulnerability Assessment
(Cont’d.)(Cont’d.)
• Vulnerabilities (Cont’d.) Removal of Directors With and
Without Cause (and definition) and by Whom
Size of Board Filling Vacancies Calling Special Meeting Amending Company By-laws (super
majority) Other
Page 13
Strategy – From the Viewpoint of Strategy – From the Viewpoint of the Insurgentthe Insurgent
• Knows company• Has been an investor for a while• Recognizes company undervalued• Has done a vulnerability analysis• Has a game plan in mind• Believes he can be successful (or
is a great card player)• Will not easily go away
Page 14
Strategy – From the Viewpoint Strategy – From the Viewpoint of the Insurgent (Cont’d.)of the Insurgent (Cont’d.)
• Will operate in stealth mode as long as possible (13D loophole for swaps)
• Has likely left a trail of warning signs• Has spoken to others (institutional
investors) who may share his views• Willing to commit time and financial
resources to the cause• Likely has a track record of having
done this before• Understands benefits of e proxy rules
Page 15
Strategy – From Target’s Strategy – From Target’s ViewpointViewpoint
• Know thine enemy (do your homework)
• Be vigilant to warning signs• Be realistic (don’t put on
blinders or be in denial)• Be prepared, be organized and
have a strategy• Know your vulnerabilities• Fine tune strategic plan
Page 16
Strategy – From Target’s Strategy – From Target’s ViewpointViewpoint
• Understand your shareholder base and monitor stock movements
• Be alert to communications from Hedge Funds
• Have a Plan A, B and C• Maximize communication
opportunities with RiskMetrics Inc. (ISS)
• The best defense is a good offense• Be nimble - ready to turn on a dime
Page 17
Strategy – From Target’s Strategy – From Target’s ViewpointViewpoint(Cont’d.)(Cont’d.)
• Recognize time is not your friend• Commit necessary time and resources
early on• Get support of Board/management early on• Keep Board (or Committee) up to speed –
communicate regularly• Don’t take eye off running the business• Have your team ready to hit the ground
running• Consider pre-emptive communication plan• Managing pressure to settle
Page 18
Recent StudiesRecent StudiesThe Conference Board (Hedge Fund Activism)European Governance InstituteNew York UniversityHarvard Business School
Conclusions• Upon announcement of hedge fund
involvement – Activism generates significant “abnormal” returns for 4 week window around announcement that do not dissipate over the subsequent year
Page 19
Recent Studies (Cont’d.)Recent Studies (Cont’d.)• Highest returns – when activist
targets the sale of the company or business strategy change – not governance.
• Over subsequent 2 year period operating results improve
• Activist skilled at identifying good takeover targets – less skilled at creating value relating to governance or operations
• What’s the harm – “costless” upside option, no real downside
Page 20
Recent Studies (Cont’d.)Recent Studies (Cont’d.)• Hedge fund engagement creates
long-term shareholder value, especially when activist wins board seats
• No study – concludes hedge fund activism destroys shareholder value
• All studies – activists achieve good results at least in short-term
• Governance activism creates little value
• “Sell the Company” activism creates the most value
Page 21
Recent Studies (Cont’d.)Recent Studies (Cont’d.)
• Issue – does hedge fund activism create environment where boards do not have flexibility to invest for the long-term
Page 22
• 11781950v3.ppt
23
HEDGE FUND ACTIVISMThe Activist Investor Playbook
24
Less likely to PubliclyPress for Change
More likely to PubliclyPress for Change
Constructive Activist
Operational Activist Reluctant Activist
Pure Activist
THE PLAYERS | Categories of Activist Investors
25
IdentifyUndervalued
Stock
ExamineCorporate
Structure &Governance
ReviewShareholder Base
DetermineChange Threshold
Buy MoreStock
Buy Stock
Contact Mgt. andRequest Change
Publicly
Discuss withOthers
Tagalong Investors Accumulate Positions
Buy More StockThreaten Proxy
ContestBuild Proxy
PlatformLaunch Proxy
Contest
NegotiateSettlement
Agreeable?
Settle
Shareholder Vote
Timeframe: 1 – 1.5 years
THE GAME PLAN | The Activist Process Model
26
ABOUT US | Hedge Fund Solutions, LLC
BIOGRAPHY & CONTACT INFORMATION
DAMIEN PARK
Mr. Park is the President and CEO of Hedge Fund Solutions, a Philadelphia-based strategy consulting firm focused on providing substantive solutions for companies on issues relating to shareholder activism.
He is widely considered an expert on activist hedge funds, consults to numerous multi-billion dollar corporations, frequently speaks at seminars and events, and is often quoted in leading business publications like The Wall Street Journal, the Financial Times, BusinessWeek, Bloomberg, The Deal, CNN Money, The Nikkei and Newsweek Japan.
In addition, Mr. Park’s firm distributes a free weekly research report called the Catalyst Equity Research Report™, which highlights US-based companies where activist investors have taken sizeable investment positions and are pressing for change. The company also administers a blog on activist investing called The Official Activist Investing Blog™ which can be read at http://activistinvesting.blogspot.com/
Contact Information:Damien J. [email protected]: +1.215.325.0514
Subscribe for FREE to receive the weekly research reports on activist investing http://www.hedgerelations.com/research.html
Managing Activist InvestorsStrategy Consulting and Specialized Public Relations
HEDGE FUND ACTIVISMThe Activist Investor Playbook
Less likely to PubliclyPress for Change
More likely to PubliclyPress for Change
Constructive Activist
Operational Activist Reluctant Activist
Pure Activist
THE PLAYERS | Categories of Activist Investors
IdentifyUndervalued
Stock
ExamineCorporate
Structure &Governance
ReviewShareholder Base
DetermineChange Threshold
Buy MoreStock
Buy Stock
Contact Mgt. andRequest Change
Publicly
Discuss withOthers
Tagalong Investors Accumulate Positions
Buy More StockThreaten Proxy
ContestBuild Proxy
PlatformLaunch Proxy
Contest
NegotiateSettlement
Agreeable?
Settle
Shareholder Vote
Timeframe: 1 – 1.5 years
THE GAME PLAN | The Activist Process Model
ABOUT US | Hedge Fund Solutions, LLC
BIOGRAPHY & CONTACT INFORMATION
DAMIEN PARK
Mr. Park is the President and CEO of Hedge Fund Solutions, a Philadelphia-based strategy consulting firm focused on providing substantive solutions for companies on issues relating to shareholder activism.
He is widely considered an expert on activist hedge funds, consults to numerous multi-billion dollar corporations, frequently speaks at seminars and events, and is often quoted in leading business publications like The Wall Street Journal, the Financial Times, BusinessWeek, Bloomberg, The Deal, CNN Money, The Nikkei and Newsweek Japan.
In addition, Mr. Park’s firm distributes a free weekly research report called the Catalyst Equity Research Report™, which highlights US-based companies where activist investors have taken sizeable investment positions and are pressing for change. The company also administers a blog on activist investing called The Official Activist Investing Blog™ which can be read at http://activistinvesting.blogspot.com/
Contact Information:Damien J. [email protected]: +1.215.325.0514
Subscribe for FREE to receive the weekly research reports on activist investing http://www.hedgerelations.com/research.html
Managing Activist InvestorsStrategy Consulting and Specialized Public Relations
HEDGE FUND ACTIVISM
SEC HOT TOPICS INSTITUTE
September 24, 2008
Philadelphia
Arthur B. Crozier
32
Activism By Traditional Institutional InvestorsActivism By Traditional Institutional Investors
Originated in response to widespread adoption of take-over defenses, particularly poison pills, during M&A wave of mid to late 80’s
Primarily led by extremely large pension funds, particularly CalPERS, due to their inability to exit investments in companies adopting such measures as the result of their largely index based investing
The “Wall Street Walk” no longer feasible
Primarily seeking structural reform (elimination of poison pills, classified boards, adoption of majority voting in the election of directors) through shareholder proposals in managements’ proxy materials
Highly successful in achieving structural reforms, at least among large cap issuers
Such activism has produced little additional value for institutional activist
More aggressive activism such as proxy fights, extremely rare
High cost compared to relatively small investment
“Free rider” problem
Background
33
Hedge FundsHedge Funds
Largely unregulated funds that can make more complex and risky investments
Investment parameters established by investment contract, rather than laws or regulations
Until recently, largely directed towards high net worth individuals
Goal is to seek absolute return under all market conditions, or “alpha”
Significantly more flexibility than traditional investment funds and can aggressively pursue leverage, short-selling, margin, derivatives and other strategies
Diversification requirements and limitations on illiquid investments much broader than other managers
Usual fee arrangements: 1-2% of assets under management (AUM) and 20% of profits
Can be higher, e.g. SAC Capital (equity funds 2% AUM, 50% of profits)
“Compensation scheme masquerading as an asset class”
Drives necessity for outsized returns
Background
34
Largely driven by investments by institutional investors, hedge funds have grown dramatically in recent years
$1.8 trillion managed by 9,000 hedge funds worldwide, as of September 30, 2007, according to 2007 Databook, Pension & Investments 2007
87% of hedge fund assets are managed by funds with $1bn AUM or more
60% of hedge fund assets are managed by funds with $5bn AUM or more
Hedge funds represent approximately 5% of all U.S. AUM, but 30% of total equity trading volume, according to SEC Chairman Cox
Hedge Funds Have Grown DramaticallyHedge Funds Have Grown Dramatically
Background
35
Hedge Fund AssetsHedge Fund Assets
Total Hedge Fund Assets (in Billions) 1990 - 2007
$39 $58
$168 $167 $185$257
$367 $375
$624
$819
$972
$1,810
$96
$538
$491
$1,104
$456
$1,463
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: 2007 Databook, P ensions & investments, 2007
36
Number of Hedge FundsNumber of Hedge Funds
Total Number of Hedge Funds 1990 - 2007
610
9,917
8,664
3,873
4,454
1,1051,464
3,616
5,379
7,436
9,462
2,3832,781
2,9903,325
1,945
821
6,297
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: The Conference Board, 2008
37
Hedge Fund by DomicileHedge Fund by Domicile
United States, 52%
Europe, 33%
Off Shore Centers, 8%
Asia, 2%
Other Countries, 5%
Source: Milken Institute, 2006
Hedge Funds by Domicile
Currently, approximately 75 hedge funds with approximately $50bn AUM employ event-driven activist style investing
Activist Hedge Fund
Atticus Capital LP
Brandes Investment Partners LP
Breeden Capital Management LLC
Children’s Investment Fund Management
(UK) LLP
Centaurus Capital Ltd
D E Shaw & Co LLC
Elliott Associates LP
Hermes
Highfields Capital Management LP
Icahn Partners LP (Icahn Enterprises
Holdings L.P.)
Ichigo Asset Management
Jana Partners LLC
Knight Vinke Asset Management LLC
Perry Corp (Perry Capital)
Pershing Square Capital Management LP
Pirate Capital LLC
Polygon Global Opportunities Master Fund
Relational Investors LLC
SAC Capital Advisors LLC
Sparx Group
Steel Partners II LP
Tracinda Corporation
Trian Fund Management, LP
Recent Targets
Deutsche Börse; Arcelor S.A
Gannett Company Inc.
Applebee’s International, Inc.
Deutsche Börse; ABN Amro Bank N.V.; J-Power; CSX Corporation; Chubu Electric
Power
Stork N.V.; Royal Ahold N.V.
Endo Pharmaceuticals Inc.; Philips Electronics
Pier 1 Imports, Inc.
VW, Prudential plc, Italmobiliare
Circuit City Stores, Inc.; Wendy’s International Inc.; Wallace-Reader’s Digest
Funds
Time Warner Inc.; Motorola, Inc.; Blockbuster Inc.; Biogen-Idec; Yahoo; ICT&G
Tokyo Kohtetsu
CNET Networks Inc.; Titan International, Inc; Philips Electronics
HSBC Holdings PLC; Suez S.A., VNU Group b.v. (Nielsen)
Mylan Laboratories, Inc.; Universal American Financial Corp.
McDonald’s Corporation, Wendy’s International, Inc.; Borders Group, Inc.;
Barnes & Noble, Inc
Angelica Corporation, The Brink’s Company
British Energy plc; Newcastle United Football Club; J Sainsbury plc
The Home Depot, Inc.; Sovereign Bancorp, Inc.; Sprint Nextel Corporation
i2 Technologies, Inc.; Take-Two Interactive Software, Inc.
Pentax Corp.
Conseco, Inc.; Rowan Companies, Inc.; Aderans Co.; Bull-Dog Sauce; Sapporo
Brewing; KT&G DaimlerChrysler AG; General Motors Corporation; MGM Mirage
Wendy’s International, Inc.; H.J. Heinz Company; Kraft Foods, Inc.; Cadbury
Schweppes plc
PROMINENT ACTIVISTS
Hedge Fund ActivismHedge Fund Activism
38
39
Why Hedge Funds Are Well Suited For Aggressive ActivismWhy Hedge Funds Are Well Suited For Aggressive Activism
High fee structure mandates extremely strong returns
Can take significant positions in targeted companies
Flexible investment diversification policies
Lock-up provisions limit investors ability to withdraw capital
“Roach Motels”
Recent increase in redemption demands by investors
Can continue to hold investment for sufficient time to pursue activism strategy
Average holding period is 20 months, Hedge Fund Activism, Corporate Governance, and Firm Performance
40
Hedge Fund Activism
Hedge Fund Accumulations
Can Occur
with Extreme Rapidity
RiskMetrics Group & Hedge Funds:RiskMetrics Group & Hedge Funds:
41
Hedge Fund Activism
ABC, Inc. Preliminary Shareholder CompositionABC, Inc. Preliminary Shareholder Composition
SHARES OUTSTANDING: 108,384,266
SHARES
CONTROLLED
SHARES AS A % OF
TYPE OF HOLDER CONTROLLED OUTSTANDING
INSTITUTIONAL INVESTORS (ISS) 33,717,125 31.11%
INSTITUTIONAL INVESTORS (NON-ISS) 23,343,908 21.54%
DISSIDENT GROUP 8,756,900 8.08%
OTHER HEDGE FUNDS 11,647,000 10.75%
DIRECTORS & OFFICERS 1,901,920 1.75%
BROKERS 26,236,670 24.21%
INDIVIDUALS 2,780,743 2.57%
108,384,266 100.00%
42
Hedge Fund Activism
SHARES OUTSTANDING: 108,384,266
SHARES
CONTROLLED
SHARES AS A % OF
TYPE OF HOLDER CONTROLLED OUTSTANDING
INSTITUTIONAL INVESTORS (ISS) 20,668,127 19.07%
INSTITUTIONAL INVESTORS (NON ISS) 14,302,688 13.20%
DISSIDENT GROUP 8,757,000 8.08%
OTHER HEDGE FUNDS/ARBS 39,687,249 36.62%
DIRECTORS & OFFICERS 1,901,920 1.75%
BROKERS 19,919,854 18.38%
INDIVIDUALS 3,147,428 2.90%
108,384,266 100.00%
ABC, Inc. Shareholder Composition – Three Weeks LaterABC, Inc. Shareholder Composition – Three Weeks Later
43
Hedge Fund Activism
Significant increase in clientele following 2003 voting disclosure regulations promulgated by SEC for mutual funds and money managers. Currently approximately 1,700 clients.
RiskMetrics clients typically hold 20%-30% of a public company’s voting power.
Many public pension funds, who are in turn ISS clients, are investors in activist hedge funds:
CalPERS PSERS (Pennsylvania) New Jersey PERS TIAA-CREF CalSTRS
RiskMetrics Group (formerly ISS)RiskMetrics Group (formerly ISS)
44
RiskMetrics recommendation is frequently outcome determinative.
In the 55 relevant proxy contests where RiskMetrics issued recommendations regarding the contest, RiskMetrics supported AT LEAST ONE dissident in 39 (or 70.91%) of cases.
In the 10 contests where board control was at risk, RiskMetrics supported the full dissident slate in 1 contest and partial dissident slates in 5 others.
In the 45 contests where board control was not at risk, RiskMetrics supported all of the dissident nominees in 13 cases (28.89%), partial dissident slates in 20 cases (44.44%) and management in 12 cases (26.67%).
In the 39 proxy contests in which RiskMetrics supported dissidents, at least one dissident gained a board seat in 27 of them (or 69.23%).
RiskMetrics’ decision regarding the number of dissident nominees to support is influenced by their understanding of board dynamics, and their view that one dissident director is unlikely to have much of an effect on board deliberations.
RiskMetrics Group (formerly ISS) Supports Hedge Fund ActivismRiskMetrics Group (formerly ISS) Supports Hedge Fund Activism
Hedge Fund Activism
45
Glass Lewis, Although Less Influential, Also Supports Hedge Fund ActivismGlass Lewis, Although Less Influential, Also Supports Hedge Fund Activism
In the 52 relevant proxy contests where Glass Lewis issued recommendations regarding the contest, Glass Lewis supported AT LEAST ONE dissident in 29 (or 55.77%) of cases.
In the 10 cases where board control was at risk, Glass Lewis supported the full dissident slate in 1 contest and a partial dissident slate in 4 others.
In the 42 contests where board control was not at risk, Glass Lewis supported all of the dissident nominees in 10 cases (23.81%), partial dissident slates in 13 cases (30.95%) and management in 19 cases (45.24%).
In the 28 proxy contests waged by hedge funds in which Glass Lewis supported dissidents, at least one dissident gained a board seat in 22 of them (or 78.57%).
Hedge Fund Activism, cont.
46
RiskMetrics Group & Glass Lewis RecommendationsRiskMetrics Group & Glass Lewis Recommendations
Contest Dissident Date
Total Board Seats
Total Seats Up For Election
Controlat Risk
Blockbuster Video Icahn 05/ 11/ 05 7 3 N DISS (2 of 3) DISS (2 of 3) DISS (3)
BKF Steel Partners 06/ 23/ 05 9 3 N DISS DISS DISS (3)
Six Flags Red Zone LLC 12/ 23/ 05 7 3 N DISS DISS DISS (3)
Cenveo Burton Capital 12/ 24/ 05 9 73Y DISS DISS DISS4
(7)
Bally Total Fitness Pardus/ Liberation 01/ 26/ 06 9 3 N DISS MGMT DISS (3)
KT&G (Korea) Steel Partners 03/ 17/ 06 6 6/ 25N DISS DISS DISS (1)
GenCorp Pirate Capital 03/ 31/ 06 10 3 N DISS (1 of 3) DISS (2 of 3) DISS (3)
Yardville National Seidman 05/ 03/ 06 13 3 N MGMT MGMT MGMT
Massey Energy Third Point 05/ 16/ 06 9 3 N DISS (1 of 2) MGMT DISS (2)
infoUSA Dolphin 05/ 26/ 06 8 3 N DISS DISS MGMT
SCPIE Holdings Stilwell Value Partners 06/ 22/ 06 12 3 N MGMT MGMT MGMT
Motient Highland Capital 07/ 12/ 06 6 6 Y DISS (2 of 6) DISS (2 of 6) MGMT
Topps Crescendo 07/ 28/ 06 9 3 N DISS DISS DISS6(3)
H.J . Heinz Co. The Trian Group/ Sandell 08/ 16/ 06 12 127N DISS (3 of 5) DISS (2 of 5) DISS (2)
Tri-Continental Corp. Western Investments 09/ 28/ 06 9 3 N DISS DISS MGMT
Bradley Pharma Costa Brava 10/ 26/ 06 8 88N DISS (2 of 3) DISS DISS9
(2)
Rural Metro Accipiter 12/ 01/ 06 7 2 N MGMT MGMT MGMT
Openwave Harbinger Capital 01/ 17/ 07 6 2 N DISS (1 of 2) DISS (1 of 2) DISS (1)
Cyberonics Metropolitan Capital 02/ 01/ 07 8 810N DISS (2 of 3) DISS DISS11
(3)
Phoenix Technologies Ramius 02/ 14/ 07 6 2 N MGMT MGMT DISS12(2)
RMR Hospitality Bulldog Investors 03/ 08/ 07 5 2 N DISS (1 of 2) N/ A MGMT13
Motorola Icahn 05/ 07/ 07 11 1114N DISS MGMT MGMT
Center Bancorp Seidman 05/ 15/ 07 17 4 N DISS (2 of 3) DISS (2 of 3) DISS (3)
Bancorp Rhode Island PL Capital 05/ 16/ 07 15 515N MGMT MGMT MGMT
Pioneer Tax Balanced Western Investments 06/ 08/ 07 9 3 N DISS16DISS (2 of 3) DISS17
(2)
Peerless Systems Corp. Pembridge Cap./ Whitehall Cap. 06/ 11/ 07 7 4 N MGMT MGMT DISS (1)
Wilshire Enterprises, Inc. Bulldog Investors 07/ 19/ 07 8 2 N DISS (1 of 2) MGMT MGMT
Pomeroy IT Solutions, Inc. Flagg Street Capital 07/ 31/ 07 12 9 18N DISS (2 of 3) N/ A DISS (3)
Ryerson Harbinger Capital 08/ 23/ 07 11 11 19Y MGMT DISS (1 of 7) MGMT
Result
(Winner)2RiskMetrics
Rec.2Glass Lewis
Rec.2
Hedge Fund Activism, cont.
47
RiskMetrics Group & Glass Lewis RecommendationsRiskMetrics Group & Glass Lewis Recommendations
Contest Dissident Date
Total Board Seats
Total Seats Up For Election
Controlat Risk
WCI Communities Icahn 08/ 30/ 07 10 10 Y MGMT MGMT Settled20
H&R Block Breeden Capital 09/ 06/ 07 11 3 N DISS DISS DISS (3)
Ceridian Corp. Pershing Square 09/ 12/ 07 7 7 Y DISS (2 of 7) MGMT (5 of 7) DISS21(4)
Gyrodyne Co. of America, Inc. Bulldog Investors 12/ 05/ 07 11 3 N DISS (1 of 3) MGMT MGMT
Nautilus Sherborne Investors 12/ 18/ 07 7 4 22Y DISS (2 of 4) DISS (2 of 4) DISS (4)
Datascope Ramius 12/ 20/ 07 7 2 N DISS (1 of 2) MGMT DISS (1)
MedQuist Inc. Costa Brava 12/ 31/ 07 12 6 N DISS (2 of 6) MGMT MGMT
A. Schulman Ramius 01/ 10/ 08 12 4 15N DISS DISS (1 of 2) DISS (2)
Luby's Ramius 01/ 15/ 08 10 4 N DISS (3 of 4) DISS (2 of 4) MGMT
Steak & Shake Company The Lion Fund 03/ 07/ 08 11 9 15N DISS DISS DISS (2)
Bassett Furniture industries, Inc. Costa Brava 04/ 15/ 08 9 9 Y DISS (3 of 7) MGMT MGMT23(0)
Office Depot Levitt Corp/ Woodbridge Equity 04/ 23/ 08 12 12 N MGMT MGMT MGMT
Media General, Inc. Harbinger Capital 04/ 24/ 08 9 3 N DISS (2 of 3) DISS (1 of 3) DISS (3)
Furniture Brands International, Inc. Sun Capital Partners, Inc. 05/ 01/ 08 8 3 N DISS DISS (2 of 3) DISS (3)
Phoenix Companies, Inc. Oliver Press Partners, LLC 05/ 02/ 08 13 5 N MGMT N/ A DISS24(2)
Charming Shoppes, Inc. Crescendo / Myca Partners 05/ 08/ 08 8 3 N DISS (2 of 3) DISS (1 of 3) DISS25(2)
Hexcel Corporation OSS Capital Management LP 05/ 08/ 08 10 10 N MGMT MGMT MGMT
Insituform Technologies, Inc. Water Asset Management 05/ 19/ 08 7 7 Y MGMT DISS (2 of 5) DISS (1)
Micrel Incorporated Obrem Capital 05/ 20/ 08 5 5 Y DISS (2 of 6) MGMT MGMT
Coinstar, Inc. Shamrock Partners 06/ 03/ 08 7 3 N MGMT MGMT DISS26(1)
Vaalco Energy Inc. Nanes Delorme Partners 06/ 04/ 08 7 3 N DISS (1 of 3) MGMT DISS27(0)
Footstar, Inc. Outpoint Capital Management LP 06/ 17/ 08 9 2 N MGMT MGMT MGMT
Biogen Idec Inc. Icahn 06/ 19/ 08 12 4 N MGMT MGMT MGMT
CSX T.C.I. / 3G Capital 06/ 25/ 08 12 5 N DISS (4 of 5) DISS (2 of 5) DISS28(2)
Emageon Inc. Oliver Press Partners, LLC 07/ 08/ 08 8 3 N DISS (2 of 3) DISS (1 of 3) DISS29(3)
Point Blank Solutions, Inc. Steel Partners 08/ 19/ 08 7 5 Y MGMT MGMT DISS (5)
Result
(Winner)2RiskMetrics
Rec.2Glass Lewis
Rec.2
Hedge Fund Activism, cont.
48
Endnotes:
1) Includes contests later settled, if still contested at time of RiskMetrics recommendation.
2) Recommendation/Result refers to full slate unless otherwise noted.
3) Dissident sought to remove all directors, reduce Board size, and elect 7.
4) Company settled 5 days before meeting, agreeing to reconstitute Board with Dissident nominees, 1 Incumbent Director, and 1 mutually agreed upon Nominee.
5) Company and Dissident litigated the issue of how many seats were up for election, and therefore how many seats were available for Dissident nominees. Ultimately the Company’s agenda prevailed and only 2 seats were available to the Dissident nominees. RiskMetrics recommended for 2 of the 3 nominees originally proposed by Dissident.
6) Settlement included expanding Board to 10, Management support of Dissident’s 3 nominees.
7) Dissident ran 5 nominees under the “Short-Slate” Rule.
8) Common shareholders entitled to elect 3 directors only.
9) Settlement reached post meeting. Two Dissident nominees elected by common holders; 1 Dissident nominee withdrew. The 2 Dissident directors then appointed 1 Management director.
10) Dissident ran 3 nominees under the “Short-Slate” Rule.
11) Three days before the meeting, Company announced settlement, with 3 incumbent nominees withdrawing and the appointment of all 3 Dissident nominees.
12) Company settled a week after the initial RiskMetrics recommendation, with company replacing its 2 nominees with 1 Dissident nominee and 1 nominee jointly representing the Dissident and the Company’s second largest shareholder (AWM).
13) Dissident did not present proxies at the meeting.
14) Dissident ran 1 nominee under the “Short-Slate” Rule.
15) Dissident ran 2 nominees under the “Short-Slate” Rule.
16) Two Dissidents ran two 3-nominee slates, with Western Investment’s slate fully supported by RiskMetrics.
17) Meeting of preferred holders to elect third nominee was adjourned for lack of quorum.
18) Dissident ran 3 nominees under the “Short-Slate” Rule.
19) Dissident ran 7 nominees.
20) Management and Dissident each named 3 directors, with balance named by large shareholders.
21) Parties reached an agreement shortly before the meeting whereby Dissident withdrew from contest, Management expanded Board from 7 to 11, and 4 Dissident nominees were added to the Board.
22) Dissident sought to remove and replace 4 directors, fixing Board size at 7.
23) Settlement included Dissident support of Management nominees, Management agreed to provide dissident with a board observer.
24) Settlement included expanding Board to 15, adding 2 dissident representatives.
25) Expand board to 11 directors, appointed 2 dissident nominees.
26) Settlement included appointing 1 dissident nominee, select and appoint to its Board an additional director from a pool of candidates to be nominated by the major stockholders of the Company, reimburse Shamrock for up to $350,000 of their reasonable out-of-pocket expenses incurred in connection with soliciting proxies
27) Settlement included increasing the size of the Board to 8, appointing a new independent director to the Board submitting a binding proposal to the Company’s stockholders at the 2009 Annual Meeting for the declassification of the Company’s Board, separating roles of CFO and President, and undertake to hire a new CFO.
28) 2 Dissident nominees appointed to the Board, 2 Dissident nominees are currently undecided pending resolution of litigation.
29) Settlement included expanding Board to 9, adding 3 dissident representatives.
Hedge Fund Activism, cont.
49
Hedge Fund Activism
Activism is not limited to the United StatesActivism is not limited to the United States
Contest Dissident
Knight Vinke • HSBC• Royal Dutch Shell• Suez SA• VNU
Steel Partners • KT&G (with Icahn)• Bull Dog Sauce• Sapporo Holdings• Aderans
TCI • ABN Amro• Deutsche Börse• J-Power• Chobu Electric Power
Cevian Capital • Skandia AB• Intrum Justita AB• Telia Sonera• Volvo
50
Hedge Fund Activism
Activism is not limited to the Hedge FundsActivism is not limited to the Hedge Funds
Contest Dissident
Fidelity • VNU• Clear Channel
T. Rowe Price • Laureate• Diversa• Cablevision
Franklin Templeton • TXU• Taro Pharmaceuticals
51
Dealing With Hedge Fund Activism -- PreliminaryDealing With Hedge Fund Activism -- Preliminary
*Source: RiskMetrics Group
Identify and understand shareholder base on an ongoing basis.
Be informed as to investment strategies pursued by any activists that take a position
Don’t panic -- remember that not all hedge funds are activists
Evaluate corporate strategy in light of shareholder base
Ensure corporate strategy has been communicated clearly and concisely to buy side and sell side analysts
Negative sell side comments in particular can be important third party validation for activist
Review all legal and regulatory remedies available
Carefully consider ramifications of each remedy
Review corporate governance structure and proxy proposals well in advance of meeting to determine if changes would be advantageous
Prepare vote projections to evaluate activist's likelihood of success and probable tactics
Vote projections will serve as road map for solicitation strategy by identifying strong and weak constituencies
Prepare for potential attacks against records of Board members and management, if a director fight
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Winning The BattleWinning The Battle
Establish timetable allowing sufficient time to gather favorable votes
Prepare communications tailored to concerns of key constituencies
Messaging must be consistent across constituencies
Personal visits with key investors
Be proactive, not defensive
Maximize turn out from individual shareholders
Fight letters
Advertisements
Telephone Calls
Meet with the relevant proxy voting advisory services.
Even if they are likely to vote against, such meetings can blunt activist’s criticism and can soften what might otherwise be an extremely harsh recommendation
Track votes as they come in to identify voters
Be prepared to adjust strategy during solicitation period
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APPENDIX: PROFILESAPPENDIX: PROFILES
54
Trian is an operational activist hedge fund
Trian “seeks to invest in undervalued and under-performing companies and to work closely with the management of those companies to enhance shareholder value through a combination of strategic re-direction, improved operational execution, more efficient capital allocation and stronger focus”
Trian often publishes a “white paper” outlining its investment thesis in a target and a roadmap for value creation
“The form of activism he's practicing is legitimate,” says Heinz's lead director, Tom Usher, the retired CEO of U.S. Steel. “[Peltz has] been a positive force at Heinz.” (Fortune, March 16, 2007)
Past targets include
Wendy’s – After the threat of a proxy fight in 2006, obtained 3 of 15 board seats. Has recently agreed to acquistion
Heinz – Obtained 2 of 12 board seats in a 2006 proxy contest
Cadbury-Schweppes – After Trian acquired a large stake in the company in early 2007, Cadbury-Schweppes announced its intention to separate its confectionery and Americas Beverages businesses
Trian Fund Management (Nelson Peltz & Peter May)Trian Fund Management (Nelson Peltz & Peter May)
Profiles
55
Former Chairman of the Securities and Exchange Commission
Has served as corporate monitor of KPMG, WorldCom, Hollinger and Fannie Mae
Launched a hedge fund in 2005 with CalPERs as a principal investor
Breeden will “seek quiet reform where possible and become as actively involved as necessary to achieve desired transformations and prevent value-diminishing corporate actions”
Applebee’s – After threatening a proxy contest in 2007, obtained 2 (of 14) board seats in a settlement
H&R Block – Obtained 3 (of 11) board seats in a 2007 proxy contest
Currently targeting Zale Corp., a specialty jewelry retailer, in which Breeden recently met with management and plans to continue discussions with executives and directors regarding the company's financial performance and strategic options, including an auction of key assets
Breeden Partners L.P. (Richard Breeden)Breeden Partners L.P. (Richard Breeden)
Profiles
56
Purchase significant block
File 13D indicating intention to influence direction of company
Threaten or wage proxy contest and/or tender offer
Obtain representation on Board
Force sale, buyback or other extraordinary action
Kerr McGee, Temple Inland, ImClone Systems, MedImmune, Blockbuster, Fairmont Hotels, Lear, Time Warner, Motorola, WCI Communities, Circuit City, Yahoo!
New stakes include BEA Systems, Biogen-Idec
Carl Icahn: Pioneered Strategic Block InvestingCarl Icahn: Pioneered Strategic Block Investing
Profiles
57
An active activist: recent targets have included, among others Ligand, Salton, Western Gas Resources, Star Gas Partners, LP, Massey Energy, Potlach, Intercept, Warnaco and Penn Virginia
Claims 28.9% return since ’95
Known for his “take-no prisoners” approach and letter writing style
To the Warnaco Board of Directors (8/21/03):
“…Do not confuse our significant equity stake with a vote of confidence in the Company’s Chairman, C.E.O. or certain members of the Board of Directors. In fact, we have grave concerns about the competency, judgement and motivation of these individuals…Stuart Buchalter, Chairman of the Board of Directors, extracted $500,000 as a non-executive Chairman in 2002 and currently receives the indefensible salary of $250,000 --- an outrageously high sum for a non-executive Chairman who had already been gifted 12,975 free shares. Appallingly, Mr. Buchalter also received a one-time cash bonus of $210,004 upon the Company’s emergence from bankruptcy in February, 2003…I knew little of Mr. Buchalter other than what he told me about himself. He informed me that he had known my father, a former partner at Irell and Manella in Los Angeles and had known my late, great-aunt, Ruth Handler, the legendary founder of Mattel, Inc. (NYSE:MAT). I met Mr. Buchalter in person at a Warnaco Annual Meeting, a handsome middle-aged gentleman, his shock of gray hair and beard and his bold red striped shirt and polka dot red tie made him look oddly like Burt Reynolds character, the pornographic producer, in the film ‘Boogie Nights’.”
Third Point (Dan Loeb)Third Point (Dan Loeb)
Profiles
58
To Irik P. Sevin: Chairman, President and CEO, Star Gas Partners L.P (2/14/05):
“…Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America. (I was amused to learn, in the course of our investigation, that at Cornell University there is an ‘Irik Sevin Scholarship.’ One can only pity the poor student who suffers the indignity of attaching your name to his academic record…It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites.”
To Ken Griffin: President, Citadel Investment Group (9/14/05):
“…I find the disconnect between your self-proclaimed ‘good to great, Jim Collins-esque’ organization and the reality of the gulag you created quite laughable. You are surrounded by sycophants, but even you must know that the people who work for you despise and resent you. I assume you know this because I have read the employment agreements that you make people sign…Good luck extracting exorbitant management fees and generating mediocre returns with your bloated organization and ego. By the way, there is little I enjoy as much as watching from afar as your reputation and ‘organization’ declines at the same rate as your falling returns.”
Third Point (Dan Loeb)Third Point (Dan Loeb)
Profiles
59
Purchase Founded in 2002, Pirate is an aggressive activist and event-driven hedge fund which reportedly grew from $300 million at the end of 2004 to $1.8 billion in 2006.
Activist investments include Angelica, Brinks and Pep Boys
In 2007, the fund’s assets reportedly declined by 80%
Pirate has recently barred investor withdrawals from two of its funds by designating four stocks held by those funds as “special investments”
In an August 31st letter to investors, Pirate stated “[i]n view of the activist nature of the funds, prior redemptions, market turmoil and their effect on the funds' individual positions and portfolios as a whole, we determined that the best way to manage the positions is through the Special Investment designation”
Pirate CapitalPirate Capital
Profiles
60
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