Field guide: the next generation of shareholder activists

In the hedge fund world, Julian Robertson’s Tiger Management spawned the Tiger Cubs, successors trained by the Old Guard who then adopted a 
distinctive style all their own. In shareholder activism, a similar phenomenon is occurring, with investors who cut their teeth with the likes of Carl Icahn, Dan Loeb from Third Point, Bill Ackman from Pershing Square and Ralph Whitworth of Relational Investors now setting up their own shops.

Over the past few years, Icahn protégés Keith Meister and Alexander Denner founded activist funds Corvex and Sarissa Capital Management, respectively, and Mick McGuire, formerly of Pershing Square, started Marcato Capital Management. Glenn Welling left Relational Investors to launch Engaged Capital and Arnaud Ajdler of Crescendo Partners founded Engine Capital.

Others, like Greg Taxin, president of the Clinton Group, and Stephen Griggs, CEO of Smoothwater Capital, distinguished themselves in the corporate governance arena before starting activist funds. And a few newcomers quite literally represent the next generation because their fathers are iconic activists enjoying near celebrity status. Think Brett Icahn, reportedly handed $3 billion by his father Carl to manage at his own discretion, or Matthew Peltz, son of Nelson Peltz of Trian Fund Management.

The new generation of shareholder activists is gaining prominence as traditional takeovers wane. ‘We’re seeing less M&A and more activism,’ says Matthew Sherman, president of Joele Frank. ‘In many instances, activism is almost a new form of hostile M&A on the cheap.’ Rather than settling for a single board seat, activists today have more bravado, says Sherman, and some try to wrest control of the boardroom without owning massive positions.

Taxin observes that ‘a decade ago, shareholder activism was a little bit of the Wild West with some maverick personalities and a bit of a gun-slinging mentality. The people involved today have been investing with this style of active engagement for a longer period of time and have developed 
professionalized approaches and skill sets.’

So here is our field guide to the new guard within activism, identifying a few people today’s corporate secretaries would be wise to keep in their sights.

Glenn Welling, founder and chief investment officer, Engaged Capital

It’s been two and a half years since Welling left Relational Investors to launch Engaged Capital, a move he sees as the next logical step in a 20-year career dedicated to ‘helping companies figure out how to get their stock prices up. I refer to us as 
private equity investors in public equities. We don’t buy control positions like [private equity investors] do. We take positions of influence.’

Take Engaged’s campaign at AeroVironment, the largest supplier of unmanned aircraft – or drones – to the US Department of Defense. Welling was intrigued because while AeroVironment was the leader in its space, its stock price seemed depressed. The company had no debt and 50 percent of its $500 million market cap was sitting on the balance sheet.

Welling emphasizes that before Engaged buys a stake in a company, it needs a concrete agenda for improving valuation. At AeroVironment, he saw a very inefficient capital structure and not enough transparency – reasons why the stock was trading at $18 when it should have been worth somewhere in the low-to-mid $30s. AeroVironment has now improved its transparency, allowing analysts and other investors to better assess the stock. Since July 2013, the share price has jumped to $40.

Engaged, which Welling says has ‘a few hundred million in assets’, focuses on firms with market caps in the $500 million to $8 billion range because these companies are not widely followed by buy-side and sell-side analysts. ‘Eighty percent of the time we work behind the scenes with management and the board to effect change,’ says Welling, who views shareholder activists as akin to unpaid consultants heavily vested in the outcome for these firms. ‘For us, it’s a rare situation where we have to file a 13D and use public means to drive change.’

Matthew Peltz, partner 
and senior member of the investment research team, Trian Fund Management

As the son of Nelson Peltz, founder of Trian Fund Management, an approximately $8 billion activist hedge fund, Matthew Peltz began studying business strategy while still in high school: ‘By the time I was 14, I was reading annual reports of companies to try to understand how a business worked, and what a P&L looked like.’

Peltz joined Goldman Sachs the day after his graduation from Yale, and spent the next two years in the consumer retail group of the investment bank and at Liberty Harbor, an affiliated multi-strategy hedge fund. He enjoyed a front-row seat for numerous LBOs in the days before the financial crisis, and observes that ‘all these smart, private equity guys were paying the highest price, using the most leverage, to buy good assets but not world-class firms.’

In January 2008 he joined Trian and now sits on the board at Arby’s. What sets Trian apart from other activist funds, says Peltz, is its focus on 
operations and the income statements at such 
companies as DuPont, PepsiCo and Mondele-z International. ‘We hope to get in there and work with the board and management to drive sales as if we owned 100 percent of the company,’ he explains.

‘Shareholders are much more engaged today – and I believe you’re going to see that increase in the future,’ he predicts. Before 2005 or 2006, he believes most shareholders felt they faced a choice between patiently holding onto an underperforming stock or selling. ‘Today, shareholders realize activism can represent a very viable third alternative,’ he says.

Peltz also maintains that CEOs, CFOs and IROs are rethinking their assumptions about activists. ‘Some of the smarter management teams realize they should be engaging, talking and listening because activists have a lot of good ideas and care about the long-term outcome,’ he concludes. ‘I believe activist funds are here to stay.’

Greg Taxin, president, Clinton Group

IROs used to fear Taxin, a Harvard-trained lawyer, former investment banker and one of the two founders of Glass Lewis, because of the power his proxy advisory firm wielded among institutional investors casting proxy votes. Today, he enjoys another type of influence: at the companies he’s targeted for shareholder activist campaigns. In 2009 Taxin joined the Clinton Group, which manages $1.5 billion in assets deployed across a number of strategies, one of which is shareholder activism.

Taxin describes becoming a shareholder activist after Glass Lewis was sold to the Ontario Teachers’ Pension Plan as ‘a natural evolution’. In his new role, he gets to test the proposition that governance and compensation practices affect how a company performs. In his five years at the Clinton Group, 
he has been involved in 41 activist campaigns, and typically targets companies with market caps in the $200 million to $4 billion range.

Red Robin Gourmet Burgers is a good example of the type of activist campaign Taxin has spearheaded. He went to the board and provided what he believes was objective evidence that this thriving business began to suffer after a new CEO came on board (the stock price plummeted from $48 per share to $16). Soon after, the board fired the CEO and added four new directors, replacing two sitting ones.

Typically, Taxin doesn’t put himself or his 
colleagues on boards because he prefers directors with industry expertise. In this case, Red Robin had only one director with restaurant experience but now has several. The board hired a new CEO, who turned around the economics at existing restaurants and has opened new ones. Today, the stock is at $71.

Arnaud Ajdler, managing partner, Engine Capital

Raised in Belgium, Ajdler came to the US in 1998 to complete a master’s degree in aeronautics at MIT. ‘I fell in love with value investing, and went to Harvard Business School,’ says Ajdler, who received his MBA in 2003. He then joined Crescendo Partners, where he worked with CEO Eric Rosenfeld on several proxy fights and sat on approximately seven public boards.

On July 1, 2013 he founded Engine Capital. ‘When I left Crescendo, I told Eric, Look, if I don’t do it now, I’m never going to do it and I will always regret it. It was my dream to eventually have 
my own fund,’ he says. Engine, which has nearly $125 million in assets under management, is a 
special-situations fund that uses activism as a tool in select situations. For activist campaigns, Engine targets small to-mid-cap companies.

To illustrate his approach, Ajdler explains that Engine owned just under 5 percent of Vitran, a firm that had recently sold off two of its major divisions and owned a large amount of real estate that wasn’t being properly valued by the markets. He sent 
management a public letter asking the company to sell itself – and a few months later, it did just that.

Ajdler foresees a bright future for shareholder activists given mounting enthusiasm for this strategy. ‘Ten years ago, institutional shareholders were not supportive of activists, but that has radically changed,’ he explains. ‘There’s more support for activists so more activists are winning contests. As a consequence, more companies are now open to 
settling with activists early on. Why go through a fight, if you think you might lose?’

Stephen Griggs, CEO, Smoothwater Capital

Shareholder activists have 
targeted many Canadian companies, and yet only a handful of activist funds are based in Canada. Griggs is an exception. In April 2013 he started Toronto-based Smoothwater Capital, which is a vehicle for the 
owners to invest their own proprietary capital. Running one’s own money creates some interesting incentives, says Griggs. ‘We’re much more long term in our focus than a fund where managers are paid on a performance fee, which is time-weighted.’

Smoothwater is targeting mid-cap companies with identifiable assets that can be independently valued. One example is Genesis Land Development Corp, a TSX company that has for several years reported a net asset value nearly twice the trading price of its shares. Griggs attributed the stock’s weakness to a rough patch at the company (regulators banned Genesis’ founder from the capital markets after the company misstated financial results). He then considered whether his firm could help solve some of Genesis’ problems. Smoothwater accumulated 22 percent of the shares outstanding and instigated a proxy fight during the summer of 2013. As a result, Griggs is now chairman of the Genesis board, and ‘we’re on a path to recognize the value embedded 
in the company’s assets and its business.’

In conclusion, Griggs explains: ‘I’m a big believer in getting the right board in place. In the case of Genesis, the board has very quickly come together and is working very effectively.’  

This article also appears in the summer 2014 issue of IR Magazine.