Institutional Investor's Alpha Magazine - October 2008 - (Page 16)

Warren Lichtenstein learns the art of diplomacy. Steel Away W arren Lichtenstein has gone east to ﬁnd investment opportunities and come back with knowledge, perhaps, of how to bridge the U.S.-Japan business-culture divide. “The principle is to hold open, frank dialogue with companies you invest in,” says Lichtenstein, founder of activist $5 billion hedge fund ﬁrm Steel Partners, based in New York. “Couple that with a strong local presence of smart local partners with lots of experience and understanding of local market and business culture.” Last year Steel’s hostile takeover bid for Japanese condiment maker BullDog Sauce Co. was thwarted by an antitakeover, poison-pill strategy. Steel mounted a legal challenge but lost and sold off its shares in April, pocketing a small proﬁt. The encounter offered a lesson: Western activist investment can be seen as unseemly in Japan. When hostility fails, then, diplomacy may work, a notion Lichtenstein appears to have embraced. In June, Steel Partners managed to block the reelection of most of the board of Japanese wig maker Aderans Holdings Co. It was the ﬁrst, but probably not the last, time that a foreign shareholder had unseated the management of a publicly owned company in Japan. Lichtenstein’s support for the sale of Malvern, Pennsylvania–based IKON Office Solutions to Tokyobased Ricoh Co., the printer and photocopier maker, offers a clue as to how he did it. Ricoh will pay $17.25 a share, or about $1.6 billion in cash, for the last independent U.S. office equipment distributor, capping a wave of consolidation among manufacturers and distributors in the sector. The deal worked for Steel because it bought millions of shares at $10.50 four years ago, holding as many as 14 million, or close to 15 percent of the company, making it the biggest shareholder. The ﬁrm sold most of that stake for $17 a share on August 17, the day of the announcement. Lichtenstein says that after building Steel’s position, he insisted on “constant and open dialogue with the management team: We met them all the time.” Lichtenstein has — or had — a reputation for playing rough. In 1999 he invested in United Industrial Corp., a Hunt Valley, Maryland–based defense contractor that made surveillance drones later used in Iraq. He joined its board and wrote public letters critical of directors and management. His aggression might not have been tolerated in Japan, but it proved fruitful in the U.S. In fall 2007, Textron, a Providence, Rhode Island–based conglomerate that makes Cessna jets, bought United for $81 a share, a 440 percent return for Steel. — Xiang Ji CLASSREVIEW A Market for Activists ugust was a hard month for hedge funds, but the volatile markets looked good to some event-driven managers — namely, activists. That’s because when a stock’s price and its true wor th diverge, value-oriented managers can move in. It was no surprise, then, when two activist hedge funds turned up among the 20 best-performing hedge funds in August, according to Chicagobased Hedge Fund Research. “ This is the market, now is the time,” says William Ackman, head of Pershing Square Capital Management, a New York–based activis t hedge fund. Pershing Square has $ 6 billion spread among three funds, including $2.1 billion Pershing Square, up A 6.70 percent in August and 7.94 for the 12-month period ended August 30, owing in par t to its long-short investing with no leverage, Ackman explains. Short positions in credit plays on MBIA, Ambac Financial Group, Freddie Mac and Fannie Mae have helped the fund achieve a 27 percent annualized return since its January 2004 inception. Recent long positions included Wachovia Bank and Longs Drug Stores Corp., both of which Ackman says were prime values. (Ackman bought Wachovia after its near collapse for about $3 a share and sold it for $5.70 before Wells Fargo agreed to acquire the bank.) Hedge funds as a whole were down 1.40 percent in August. But HARUYOSHI YAMAGUCHI/BLOOMBERG NEWS New York–based Barington Capital Group’s $71 million Barington Cos. Equity Partners, the other activist fund among HFR’s top performers, was up 10 percent — although it is down 3.72 percent over three years, a reminder of how tough this business has been and may continue to be. “We were pleased with our performance in August, but that performance may be difficult to maintain given the volatility in the market,” says Samuel Cassetta, senior managing director and COO at the ﬁrm. — F.D. Event-Driven Funds Return (%) One year through August –3.31% –1.28 –11.13 Three years through August* 6.31% 7.08 3.66 Three-year annualized standard deviation 5.24 5.70 10.06 Benchmark HFRI event-driven (total) index HFRI fund-weighted composite index Standard & Poor’s 500 index * Annualized. August –0.42% –1.40 1.45 Source: Hedge Fund Research. 16 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2008

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

Institutional Investor's Alpha Magazine - October 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Process of Evolution The Good Guys: Israel's Champion Interview: Fast Lessons for Hard Times Cover Story: Industry Under Siege The New Hedge Fund Economics Good-Bye, Easy Money Caging the Shorts Strategies: Bottom Fishing Profile: Cult of Personalities Research Center: Alpha Awards: Eye of the Storm Alpha Bytes: Funneling the Chatter Unhedged: Commentary: Attention, Hedge Fund Shoppers

Institutional Investor's Alpha Magazine - October 2008

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