Hedge Fund Guys Think They're Smart. Let's See.
I'm not going to claim that the proxy fight between Buffalo Wild Wings Inc. and Marcato Capital Management LP, which ended on Friday just before the company’s annual meeting, was the most important proxy battle this year. It wasn't.
Buffalo Wild Wings is a mid-cap company in the "casual dining" category, with a stock valuation of $2.5 billion. Marcato, an activist hedge fund run by a 39-year-old Bill Ackman protege named Richard "Mick" McGuire, is a mid-sized hedge fund with around $1.3 billion under management.
Nonetheless, this is the 2017 proxy battle that could best show whether hedge fund whizzes and private equity geniuses are as smart as they think they are.
Sally Smith, 59, has done a fine job as Buffalo Wild Wings' chief executive since it became a public company in 2003. 1
Or at least that was the case until about 18 months ago, when the company began to flounder and the stock dropped 26 percent from its 2015 high.
The flagging stock caught the attention of the baby-faced McGuire, 2 who had started Marcato in 2010, and has made a handsome living buying up shares in mid-cap companies, making some noise about shareholder value, and coming away with a gain for his hedge fund.
Last year, Marcato began accumulating Buffalo Wild Wings shares, ultimately controlling 9.9 percent of the stock. After compiling a list of changes he felt the company should make to boost the share price, and unsatisfied with the company’s response, McGuire launched a proxy fight in February, nominating four people, including himself, to join the board. I concede that when I read about this, I thought: such an Ackman-like move!
Indeed, what was most striking -- and a little amusing -- in the months leading up to Friday's annual meeting, was the uncanny way McGuire aped his mentor’s moves. Here he was setting up a new website, Winning at Wild Wings, where he posted all his criticisms, while gathering criticisms of others, including anonymous employees and on-the-record research analysts. It was just like Ackman's famous anti-Herbalife website, Facts About Herbalife!
There he was rolling out a 30-page slide deck -- just as Ackman did when he was going after MBIA! -- laying out the company's deficiencies and presenting his own plan, which he said could cause the share price to double or even triple in a few years.
On CNBC -- and, goodness, the student seemed to enjoy being on CNBC almost as much as his former teacher -- McGuire always spoke in perfect hedge-fundese:
They need to improve the four-wall margins of the company units they operate, they need to transition to a more highly franchised model that reduces the capital intensity, they need to allocate capital efficiently, and that includes a balance sheet that minimizes or optimizes their cost of capital.
Yes, it was all quite amusing -- until Friday's annual meeting, when Buffalo Wild Wings shareholders tossed aside Smith's long-term record and cast its lot with Marcato, voting in three of its board nominees, including McGuire. Smith and the directors, of course, knew before the meeting that they had lost the proxy fight, and starting at eight in the morning the two sides huddled in private.
As the talks dragged on, the meeting was postponed for an hour so they could continue. Around noon, with some investors fearing that Marcato had lost and McGuire was negotiating an exit, the stock took a tumble.
But then the parties emerged, and investors learned not only that Marcato had won but that Smith was going to leave the company at the end of year -- or earlier, if a successor was named. The stock rocketed upward.
McGuire and his allies will still be outnumbered on the board, 6 to 3. But given that his proxy fight was as much about his plan as it was about his board nominees, he will be treated with deference by the board holdovers. It’s likely that the board will agree to chart the course he has laid out.
Hedge fund managers and private equity types have a mixed record, to say the least, when it comes to fixing troubled companies (as opposed to lining their pockets as the companies sink further, which they are very good at). During the Buffalo Wild Wings proxy fight, McGuire talked confidently about how, for instance, selling off most of the company-owned restaurants to franchise owners would boost margins and profits.
Now he has to show that his plan will work, and that it will boost the stock price while strengthening the company. That's a tall order for someone who's never run a restaurant, much less a restaurant chain.
So here's my proposal. Over the next few years, we're going to check in from time to time on Buffalo Wild Wings and Mick McGuire, to see how it, and he, are progressing. We're going to find out, in other words, if this young financier knew what he was talking about.
In the meantime, we wish the company, and its new director, all the best.
Smith became CEO in 1996, having joined the Buffalo Wild Wings two years earlier as its chief financial officer.
In recent months, he has grown the kind of bushy beard professional baseball players seem to favor these days. If nothing else, it makes him look older.
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