Ralph V. Whitworth and David H. Batchelder have two of the trickier jobs in the money-management world. They buy a chunk of an ailing company, say Mattel (MAT) or J.C. Penney (JCP) or Waste Management (WMI), then politely tell the board it should be doing a much better job before prodding, cajoling, and twisting arms to get their way.
Sometimes doors get slammed in their faces. Sometimes a chief executive seethes with resentment. But usually the company comes around -- and Whitworth and Batchelder walk away with a huge gain on their shares. "Most of the time, management agrees that its stock is undervalued and knows what's causing it," Batchelder says. "It's just a question of the timing of the fix."
The two run San Diego-based Relational Investors, and their mentor, legendary corporate raider T. Boone Pickens Jr., would be proud of their results. In its eight-year history, the firm has racked up an average annual return of 21%, more than doubling the performance of the Standard & Poor's 500-stock index. In that time, its assets -- the fund is open only to institutional investors -- have grown from $200 million to $3 billion.
Few firms have been able to pull off a similar strategy -- talking boards into making tough changes -- much less match Relational's record. Shareholder activists Nell Minow and Robert Monks sold their money-management business several years ago after finding it hard to generate market-beating returns when it can take years to show results from each company. "I tend to get impatient with people," says Minow. "Ralph and David are more consensus-builders."
The California Public Employees' Retirement System gave Relational its seed money but has had mixed results with its six other activist funds. CalPERS remains Relational's largest investor, putting in nearly $1 billion.
The Relational formula is surprisingly simple. Whitworth, Batchelder, and a staff of 12 analysts comb though databases for companies with a strong core business but a stock price that seems depressed. A closer look often shows a company plagued by management mistakes. Relational then buys a stake and presses for change in meetings with execs and board members.
Whitworth and Batchelder don't spread themselves too thin: Relational usually holds stakes in no more than 12 companies -- it figures that's enough works-in-progress to handle at a time. Right now it's invested in 11 companies.
Frequently, Whitworth's and Batchelder's prescription calls for ditching an underperforming unit. After winning a seat on Mattel Inc.'s board in early 2000, Whitworth persuaded management and his fellow board members to dump the company's money-losing computer-game business, Learning Co., less than a year after Mattel bought it for $3.5 billion. "That was strong medicine," recalls Mattel's chairman and CEO, Robert A. Eckert, who joined Mattel after the Learning Co. deal. "Ralph had done a lot of homework. After we did it, the stock went up."
In the past year, Relational has pushed retailer J.C. Penney Co. to sell its flagging Eckerd drugstore unit and National Semiconductor Corp. (NSM) to shed some of its weak digital-chip businesses to focus on analog chips. Both companies took Relational's advice and their stocks soared, contributing to Relational's 2003 return of 48%. The fund was up 11.6% in the first half of this year, vs. 3.4% for the S&P 500.
Not all of the pair's forays have been successful. After Relational's 1997 investment in oil-and-gas producer Nuevo Energy Co. (NEV), Whitworth and Batchelder got the company's chairman and CEO to step down, eliminating his expensive management contract. But Nuevo's reserves didn't prove as valuable as the pair had hoped, and Relational sold its shares six years later, taking a loss of over 70%. They vowed never to invest in a commodities-based business again.
In pursuit of their goals, Whitworth, 48, and Batchelder, 55, have never had to wage a proxy fight. Through their badgering -- and, no doubt, the threat of a fight -- they've gotten themselves on the boards of half a dozen companies, including giant ConAgra Foods Inc. (CAG) and home health-care provider Apria Healthcare Group Inc.
Once on the board, Whitworth and Batchelder remain only long enough to get their changes implemented. "Ralph in the boardroom was a clear voice for shareholders," says A. Maurice Myers, chairman of trash hauler Waste Management Inc. (WMI), where Whitworth helped replace the CEO and shift the company from acquiring businesses to managing better the ones it had. "His focus is always on the allocation of capital to its highest and best use."
Whitworth met Pickens while working as a U.S. Senate staffer in Washington in the early 1980s. That led to a job at Pickens' oil-and-gas firm, Mesa Petroleum. That's where Whitworth, a lawyer by training, first teamed up with Batchelder, an accountant. The two helped Pickens with many of his famous takeover battles in the mid-'80s, including his runs at Phillips Petroleum and Unocal (UCL). After leaving Mesa, Batchelder and Whitworth each formed his own investment-advisory business before joining forces at Relational in 1996. Call them the kinder, gentler corporate raiders.
By Christopher Palmeri in San Diego