Activist Funds Loaded With Capital Augur Dealmaking Surge
Food producer Ralcorp Holdings Inc. (RAH) refused to accept a takeover bid from rival ConAgra Foods Inc. in 2011. A year later, 39-year-old activist investor Keith Meister stepped in.
On Aug. 23 Meister, a onetime Carl Icahn protege, disclosed that he had accumulated a 5.1 percent stake in St. Louis-based Ralcorp, hoping to restart talks with ConAgra. Just three months later Ralcorp, now headed by a new chairman and with Meister on the board, agreed to ConAgra’s $5 billion bid. Ralcorp Chief Executive Officer Kevin Hunt said the deal provided “compelling cash value to shareholders.”
Meister’s activist fund Corvex Management LP turned a quick $90 million on its $189 million investment, or 48 percent, according to Bloomberg calculations based on company filings. The win underscored how activists are shaking loose deals and making big returns, auguring a rise in mergers and acquisitions this year. Meister declined to comment.
“We have seen a dramatic increase in the level of shareholder activism,” said Patrick Ramsey, co-head of Americas M&A at Bank of America Corp., who predicts that activism will contribute to an increase in M&A this year.
With financing cheap and share prices sluggish, shareholder activists last year started 219 campaigns against companies they deemed undervalued, a 22 percent increase from 2011 and the most since 2008, according to data from Norwalk, Connecticut-based Factset Research Systems.
More investor dollars has meant more activism. Facing few high-yield alternatives, investors including institutional funds poured about $3.8 billion into activist funds after returns in 2012, compared with $1.8 billion in 2010, according to Hedge Fund Research, a Chicago-based firm.
“We wanted to consider all options due to the low return environment,” said Aeisha Mastagni, an investment officer for the California State Teachers’ Retirement System. It has a $3 billion portfolio of activist investments among its total of $154.3 billion under management. The California Public Employees’ Retirement System is putting $1.25 billion over the next five years into a fund of its own, said senior portfolio manager Anne Simpson.
Investors have been rewarded. While the Standard & Poor’s 500 Index rose 13 percent in 2012, activist funds jumped 25 percent, according to Mazin Jadallah, CEO of San Francisco-based money management firm AlphaClone, which tracks activist funds.
M&A could use a boost from the activists. Dealmaking declined 10 percent globally in 2012 to $2.19 trillion, buoyed only by a strong fourth quarter, according to data compiled by Bloomberg.
Hedge Fund Involvement
Activist investors, mostly hedge fund managers, were dubbed corporate raiders amid the hostile takeovers of the 1980s. They tend to buy at least 5 percent of a company’s stock and flag their status by disclosing their holding in a 13D filing with the Securities and Exchange Commission.
While many hedge funds try their hand at activist investing, only a few focus on it as their core strategy, including Icahn, Starboard Value LP, Dan Loeb’s Third Point LLC and ValueAct Capital Partners LP.
“Substantial amounts of money can be made through activism, but you have to have a large amount of long-term committed capital to be successful,” billionaire activist Carl Icahn said in a phone interview.
The wake of the financial crisis has left “a substantial price gap between sellers and buyers,” said Gideon King, CEO of Loeb Capital Management, a New York-based hedge fund. “That’s one of the reasons why you see a return of activists who can push the parties to the bargaining table to try to narrow this chasm.”
Mature technology companies laden with cash are an especially ripe target, said Gene Sykes, Goldman Sachs Group Inc.’s global head of mergers and acquisitions.
Agitation by hedge-fund manager Elliott Management Corp. has put BMC Software Inc. (BMC) on the block, and it might be taken private this year, according to three people familiar with the situation. Last year it attracted interest from private equity firms including KKR & Co., TPG Capital and Bain Capital LLC, people familiar with the situation said Oct. 22. Elliott, which owns 8.1 percent of Houston-based BMC, will push again this year for a sale of the software maker, said one of the people, who asked not to be identified because the situation is private.
Mark Stouse, a spokesman for BMC, and Peter Truell, a spokesman for Elliott, declined to comment.
Activist Jeffrey Ubben, co-founder of ValueAct, moved against industrial equipment maker Gardner Denver Inc. after it fired its CEO last July. The fund bought a 5 percent stake for $64.5 million and demanded the board sell the company, citing the lack of strong management. The Wayne, Pennsylvania-based company is talking with several private-equity firms, following the collapse of a deal with SPX Corp. in December.
Loeb’s Third Point and Bill Ackman’s Pershing Square Capital Management LP are now jousting over Herbalife Ltd. (HLF), a high-profile battle that may put the vitamin distributor in play for a takeover even though it’s not a traditional activist fight. Calling the company a pyramid scheme, Ackman has shorted the stock while Loeb has bought an 8.2 percent stake, betting that Ackman is wrong -- as the Grand Cayman-based company has said.
The agitation could push Herbalife into the hands of a private-equity firm, said Robert Chapman, founder of hedge fund Chapman Capital Partners. His fund placed “a monster long bet” on the company, he wrote in a letter rejecting Ackman’s pyramid argument.
“There is far more likelihood of another LBO of Herbalife than any other headline risk,” he wrote.
Loeb moved in a traditional activist way on Jan. 9 when he bought a stake in Morgan Stanley and urged the bank to address its fixed-income unit and make board changes. He previously pushed for an overhaul at Yahoo! Inc. and won the ouster of Chairman Roy Bostock.
Some of the activists are claiming too much credit when they buy in to companies that are already ripe to be sold, said Andrew Bednar, a partner at New York advisory firm Perella Weinberg Partners, which defends companies against shareholder campaigns.
“There is often not a cause and effect between activist action and management decisions,” Bednar said.
Ralph Whitworth, co-founder of activist fund Relational Investors LLC, responded: “It’s true that management has often heard similar suggestions from bankers, investors or analysts, but an amazing number suffer from the ready, aim, aim, aim syndrome.”
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