January 27, 2014 5:33 pm

Elliott makes waves with activist broadsides

By Ed Hammond and Stephen Foley in New York

Elliott Management, the US hedge fund, timed its recent attack on Juniper Networks carefully.

Shaygan Kheradpir, the technology company’s new chief executive, had been in the job less than a fortnight when Elliott revealed it owned 6.2 per cent of Juniper’s shares and wanted changes in the way it was managed. Mr Kheradpir had barely had time to organise his new desk, let alone lay out his own vision for the business.

The manoeuvre is typical of Elliott. The company, until recently little known outside the corporate finance world, is cutting a reputation as an aggressive and adroit activist investor, hungry to take on businesses across America and Europe.

Elliott, founded by Paul Singer more than 35 years ago, has long been associated with the more traditional hedge fund practice of distressed debt investing.

Until recently, the company was best known for engaging in a protracted fight with the Argentine government over its refusal to accept the terms of the country’s proposed debt restructuring.

After winning a court order awarding it $1.6bn in Argentine assets, a subsidiary of Elliott arranged for the seizure of ARA Libertad, a $10m, 100m-long sailing ship that operates as a school vessel in the Argentine navy.

However, the $23bn fund has been allocating more of its resources to corporate activist situations, in part because those kinds of distressed debt opportunities have ebbed. Defaults are at record lows and most companies are presently having little difficulty refinancing.

At the same time, corporate activist investing has proved lucrative at a time of rising equity markets. According to eVestment, a data provider, corporate activism was the best-performing hedge fund strategy in 2013, as specialist funds returned 19.1 per cent for the year compared with 9.2 per cent for the hedge fund industry as a whole.

Elliott’s particular brand of activism lacks the effrontery that has made celebrities of Carl Icahn, Bill Ackman and Daniel Loeb. But in the scope of its activity, the hedge fund stands out from the pack.

Since the start of 2014, Elliott has taken a stake in Wm Morrison, the struggling UK grocer, forced a higher price in McKesson’s acquisition of rival drug distributor Celesio, and prompted a reshuffle of the board of directors at business software group Compuware.

A theme running through the hedge fund’s approach, say its executives, is “manual labour” – the idea that returns are to be generated by actively pushing for change, whether that be at a bond issuer that has fallen into difficulty, or a sovereign issuer that needs to be pressured to treat creditors better, or at a company with poor operational performance, an unhealthy balance sheet or weak management, or all three.

Yet, to gain a better perspective of Elliott’s stature among activist investors, it pays to look to the technology sector.

Led by Jesse Cohn, an energetic 33-year-old who grew up as a self-described computer programming geek, Elliott has rewritten the playbook for taking on America’s technology companies. Mr Cohn, who heads the hedge fund’s activism practice in the US, has turned the insularity of Silicon Valley – the very characteristic that many investors would regard as a barrier to engendering sweeping change – into a weapon in the launch of campaigns against 30 companies in eight years.

It is a pre-eminence that was sparked by a chance moment in 2005.

Elliott was weighing the merits of taking a small stake in Enterasys Networks, a little-known maker of internet routers. The then 25-year-old Mr Cohn’s interest in technology landed him the responsibility for the investment. Elliott pressured Enterasys’s management to sell the company to a private equity buyer, doubling its money in the process. Mr Cohn was readily given the task of finding more opportunities in the sector.

One Silicon Valley banker, who did not want to be identified, says Mr Cohn has “made a name for himself by not being afraid to challenge the status quo of these companies that a lot of outsiders view as being among the most sophisticated and intelligent businesses”.

The strategy has drawn criticism too.

Elliott’s pursuit of Riverbed, a technology group that it is pushing to sell itself, has been questioned by some in Silicon Valley as being an underestimation of a respected board with a willingness to yield.

Even its move on Juniper – which sent shares rallying 8.6 per cent and has since been backed by rival activist fund Jana – has been questioned as being merely an amplification of the changes the company was already enacting, such as cutting costs and increasing its dividend.

Whether these, or other criticisms of Elliott’s approach will bring much in the way of comfort to Mr Kheradpir remains to be seen.