Institutional Investor's Alpha Magazine - May 2008 - (Page 64)

Unhedged Commentary Not Your Father’s Activist By Kenneth Squire o borrow from an old joke, “I wrote three books and nobody ever called me an author, but you ﬁle one 13D and all of a sudden you’re an activist.” It seems that “activism” is admired in every walk of life except investing. If you are a parent who joins the PTA, you are regaled in the community as a conscientious parent, and if you are an apartment owner who joins the co-op board, you are admired in the building as a good tenant, but if you are a stockholder who wants a board seat, you are instantly labeled in corporate America as an “activist.” Activism is becoming increasingly popular as an investment strategy among hedge funds for one main reason — it works. According to our research at 13D Monitor, the average return for more than 200 material activist campaigns that were completed during the past two years was 18.55 percent, nearly double the average return Unlike the of 9.49 percent for the Standard & Poor’s 500 stock index for the corporate raiders same time periods. Not surprisingly, savvy institutional investors of the 1980s, like the California Public Employtoday’s generation ees’ Retirement System have been plowing assets into activist funds, of activist investors which have been growing in size and number. And with the recent are taking actions downturn in the equity markets, activism is expected to become that beneﬁt even more prevalent as the numall shareholders. ber of attractive targets grows. The word “activist” is often viewed with a negative connotation, in large part because of its history. However, activist investors have transformed from “corporate raiders” who were concerned only with making money for themselves, often to the detriment of other stockholders, to “shareholder activists” who are concerned only with making money for themselves but almost always to the beneﬁt of other stockholders. This transformation started in 1984, when Walt Disney Co. shareholders won an injunction against Saul Steinberg, who ultimately agreed ﬁve years later to return to them $21.1 million of his $60 million greenmail profit. The transformation advanced one step further in 1989, when Roy Disney’s Shamrock Holdings was on the receiving end of greenmail from Polaroid Corp. but insisted as part of its agreement that Polaroid pass on to shareholders a sizable T chunk of any damages it received from Eastman Kodak Co. for patent infringement. Shamrock brought this transformation to its modern-day incarnation during its recent activist efforts with wireless network provider iPass, where it unequivocally rejected any kind of greenmail, stating to the iPass board that Shamrock was fundamentally opposed to greenmail in any form and will not participate in or condone such an abuse of shareholder trust. Shamrock’s activities reflect the transformation of shareholder activism in general. Barington Capital Group recently thwarted a plan by the Syms family that would have taken the valuable assets of retailer Syms Corp. private to the detriment of the 45 percent of shareholders who are not family members. Warren Lichtenstein of Steel Partners has been a board member of United Industrial Corp. for more than seven years, achieving a greater than 400 percent return for Steel and the other shareholders over that time. Although it can be debated whether the efforts of activists to persuade companies to return unused capital to shareholders actually enhances the long-term value of a company, one thing is certain — these transactions treat all shareholders the same. Activism has become so mainstream, that even former Securities and Exchange Commission chairman Richard Breeden has launched an activist hedge fund. Although to many corporate CEOs this might seem like the director of Homeland Security joining Al Qaeda, it is really a very natural progression. Breeden simply went from protecting shareholders on a regulatory level to protecting them in the trenches as an activist. After all, it is the activists who are ﬁghting for shareholders’ rights by urging companies to eliminate such antishareholder provisions as staggered boards and to implement better corporate governance practices. Activism affects every industry and portfolio and is at the very least an external force that touches all companies. It has also become more accepted and respected by big, traditional investors who are not likely to lead activist campaigns but realize the value of understanding activist behavior in today’s market. What most shareholders are starting to admit is that given a choice between a market without activists and a market with too many, they will choose the latter every time. Kenneth Squire is the founder of 13D Monitor, a New York– based research and advisory ﬁrm specializing in analyzing 13D ﬁlings and shareholder activism. 64 • INSTITUTIONAL INVESTOR’S ALPHA • MAY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.