Activist investors bump into each other in campaigns

By Soyoung Kim and Olivia Oran

NEW YORK, March 17 Mon Mar 17, 2014 7:15am EDT

NEW YORK, March 17 (Reuters) - When Barington Capital Group in October reported a stake of more than 2 percent in Darden Restaurants Inc (DRI.N) with a vow to shake up the company, another investment firm was caught off guard.

Starboard Value LP, which takes stakes in companies that it perceives to be undervalued with the hopes of making changes, had studied the restaurant chain for six months as a potential target and was waiting for the right moment to pounce.

But news of Barington's investment sent stocks sharply higher that month, forcing Starboard to wait another two months until shares fell back. In December, it went public with its 5.6 percent position just after Darden reported weak earnings.

A few months prior to that, an activist fund was preparing to go public with proposals to shake up Aeropostale Inc (ARO.N) and was amassing a stake, only to learn that Sycamore Partners had taken an 8 percent stake in the teen clothing retailer.

Sycamore's disclosure sent stocks surging nearly 20 percent on the day of the announcement, making it expensive for the activist fund to buy more shares. The fund, which asked not to be identified for this article, passed on a campaign.

The examples show how investors are increasingly bumping into one another in corporate campaigns, as more funds are starting to follow the playbook of aggressive shareholders such as Carl Icahn and Bill Ackman, who use their stock positions to urge companies to sell, break up, buy back shares or oust management.

Investors and their lawyers say that it's getting tougher to find easy targets as investors are chasing the same "low-hanging fruit" - companies that have poor corporate governance or performance and are vulnerable to calls for change.

"There's only so many companies that are undervalued and a lot of people are looking at the same screen and the same performance criteria," said Steve Wolosky, a partner at law firm Olshan Frome Wolosky LLP.

John Studzinski, who leads the advisory arm of Blackstone Group LP (BX.N), estimates that almost 20 percent of the S&P 500 companies have already had some type of activist involvement.

The strength of stock markets -- the S&P rose 30 percent in 2013 -- means there are fewer cheap stocks to buy. Moreover, companies, realizing that it's too late when activists show up on their doorsteps, are proactively taking steps such as breaking up the company or boosting buybacks. That removes some potential for activist intervention, lawyers and bankers say.

They say that with fewer obvious targets where activists can get in and out for a quick fix, activists will inevitably go after some of the better-performing companies in order to deploy capital. Activist returns, which handily outperformed those of traditional hedge funds in recent years, may take a hit if complicated corporate attacks start to produce mixed results.

For the companies themselves, the consequence of multiple agitators could mean a more costly and time-consuming battle, a distraction from running day-to-day operations, as well as greater fees for legal and defense advisors.

"It's a tough message for a board of a management team to deny something when multiple sophisticated investors are saying 'this is what the problem is and this is why the market is valuing you incorrectly'," said Philip Larrieu, a senior investment officer at the California State Teachers Retirement System (CalSTRS).

MULTIPLE AGITATORS

In addition to Darden, others who have fended off at least two activist investors in the stock include Juniper Networks Inc (JNPR.N), where both Elliott Management Corp and Jana Partners LLC reported stakes, and Sotheby's (BID.N) which is under the scrutiny of Third Point LLC and Marcato Capital Management LP.

Emulex Corp (ELX.N) and Compuware Corp (CPWR.O) have three activist funds involved in the stock. In the last two weeks alone, at least three U.S. companies -- Aarons Inc (AAN.N), BJ's Restaurants Inc (BJRI.O) and ALCO Stores Inc (ALCS.O) -- saw two different investor groups nominate competing slates to their boards.

Competition for the same targets is spurred in large part by the sheer number of investors increasingly willing to use activism and the ever-growing warchest that activist funds can tap into.

In 2013, activist hedge funds added nearly $5.3 billion in net asset inflows, up sharply from $2.9 billion in the previous year and the most since 2006, according to data compiled by Hedge Fund Research.

Total assets in activist funds — a small slice of all hedge-funds assets — stood at $93 billion at the end of 2013, an all-time high and up 42 percent from the prior year, the data show.

Some of that rush of money is performance chasing. On average, the roughly 60 funds tracked by HFR that specialize in activist investing returned 16.6 percent in 2013. While that is still less than the Standard & Poor's jump of roughly 30 percent, it is far better than the average hedge fund, which returned 9.3 percent, HFR data showed.

These trends have supported a new crop of investors who left funds like Icahn Enterprises LP and Ackman's Pershing Square Capital Management to set up their own shops in recent years.

Further crowding the field, funds that have historically preferred to stay under the radar are choosing to go public with their campaigns.

Last year, hedge fund TPG-Axon Capital led a successful proxy fight against SandRidge Energy Corp (SD.N), its only second such public fight in its 8-year history, and First Manhattan Co won a proxy battle at drugmaker Vivus Inc (VVUS.O), which marked one of its only two forays into activism in nearly 50 years.

Rishi Bajaj, managing principal at activist investment firm Altai Capital, thinks having multiple funds with similar perspectives involved in the same company can sometimes help because that gives them a larger percentage of shareholder base that has an agenda of change.

But other times, investors are fighting it out to the detriment of one another. In February, investment firm Voce Capital Management LLC, which was seeking to nominate four directors to ConMed Corp (CNMD.O), lambasted the surgical device maker for giving two board seats to another activist investor, Coppersmith Capital, instead.

Voce went as far as questioning the qualification of the Coopersmith directors. It pointed to the directors' track record including their unsuccessful attempt at gaining board seats at Alere Inc (ALR.N) last year, saying "serious and troubling" questions were raised about each candidate.

"Now companies have two different activists potentially to try to satisfy, and those two activists may have different or even competing objectives. If you satisfy one activist and settle, the other one could keep coming at you," said Marc Weingarten, head of the activism practice at law firm Schulte Roth & Zabel LLP.

Blackstone's Studzinski said that if activists position their campaign in a way where they will not step on each other's toes, "one plus one could equal three."

When Keith Meister, Carl Icahn's one time right hand man, set his sights on shaking up CommonWealth REIT (CWH.N) a year ago, he didn't know that he would soon have company in the form of other hedge funds who were equally ready to fight over the real estate investment trust's structure and high fees being paid to its controlling family.

Meister's Corvex Management, working with Related Fund Management, laid out its requests and a threat to remove the board in a regulatory filing on February 26, 2013. On the same day Luxor Capital Group, already an investor, cheered Corvex's actions in a news release.

Two weeks later Richard Perry's hedge fund, an occasional activist, jumped in with its own 13-D filing, signaling activist intentions. And by the end of June, Corvex had rounded up Luxor, Perry and Marcato Capital Management to act as a group, according to a regulatory filing.

Such a coordinated approach among activists could add pressures on companies to make changes, potentially boosting returns for all shareholders.

Activists could "all bring their investing perspective, providing a richer menu of intelligence and perspective," Studzinski said. "But they could also discredit each other's argument and one plus one could equal one half."

Some institutional investors who invest in activist funds say the increased crowdedness could result in a shakeout.

"Some activists may decide that this strategy is harder than it looks and that it's not the right strategy for them to pursue," said California State Teachers Retirement System's Larrieu. "It's a lot of campaigning, making press calls, presenting to investors and answering questions -- it's all a lot harder than just running a portfolio."

(Reporting by Soyoung Kim and Olivia Oran, additional reporting by Nicola Leske in New York and Svea Herbst in Boston, editing by Ross Colvin)