Monday, April 4, 2011

Activist Investors Talk Strategy

Phil Goldstein, Bulldog Investors
While there has been much press coverage about activist 13D filings of late, CNBC's The Strategy Session has been particularly effective in shedding light on the activist modus operandi. On March 18, 2011, Phillip Goldstein discussed the benefits of SPAC investing. He views SPACs as "extremely safe… If [management] can't come through with an attractive transaction then you get your money back… But you have the optionality--if they do come through with an attractive transaction--that the the stock can go significantly higher… You can't lose".

Note: On January 22, 2009 Damien Park, Managing Partner Hedge Fund Solutions, wrote an article for RealMoney titled, "Activists Pounce on SPACs".  One year later we posted the investment returns of the SPACs listed in the article.  [Available Here]

Goldstein also spoke about hedging volatility risk through investing in special situations and how the environment for activism is "excellent". Currently, Goldstein believes he has found "a very attractive situation" at Casey's General Stores (NASDAQ: CASY), which earlier escaped a $2 billion hostile offer from Couche-Tard, then rejected a $43 per share friendly takeover offer from 7-Eleven, and has recently missed earnings expectations. Goldstein acknowledges that while the company is well managed, it is now trading at a discount to the valuations of previous offers and is thus an ideal candidate for both shareholder activism and a takeover. CASY is unique to Bulldog's portfolio, as the activist typically invests in closed-end funds trading below NAV and then persuades management to make a transaction that closes the discount. According to Goldstein, "It produces alpha--real sustainable alpha without leverage--and reduces risk over the long-term. It works".

Donald Drapkin, Casablanca Capital
Several days later, CNBC also had Donald Drapkin on The Strategy Session. Drapkin discussed shareholder activism, characteristics of hostile takeover targets, and Mentor Graphics. Interestingly, one of the companies that they highlight as a possible target, Pentair (NYSE: PNR), has also been pressured for a breakup as a result of recent strategic shareholder activism elsewhere. In particular, the pressure has intensified due to the recent breakups of ITT, Fortune Brands, and Motorola by campaigns from activist shareholders Relational Investors, Pershing Square, and Carl Icahn, respectively. Accordingly, Drapkin states that "Pentair is on everybody's list". Marvell and Mattel--the latter of which Icahn currently has a position in--were also highlighted as possible mid-cap targets based on their lagging price-to-book ratios, low debt-to-equity, strong interest coverage & sufficient cash flow, and shareholder value at the low end of 52-week range.

Drapkin emphasized "[some] of the things that you look at as an activist investor":

- stock underperformance;
- excessive compensation;
- directors not having a sufficient equity stake in the company;
- slow business development;
- excessive SG&A; and

for hostile takeover targets:
- divisional misalignments; and
- cash holdings.

See Also: More Hostile Takeovers Likely This Year

Posted by David Schatz