TECHNIC AL


pay its board nominees kick-started an industry-wide debate about anti-activist company by-laws.


The activist’s extensive assets under management allowed it to make three bets worth more than $1 billion in 2013, but its relatively concentrated activities and preference for privacy contributed to a slightly lower-than-expected ranking in our top 10.


7.


JANA Partners, the hedge fund led by Barry Rosenstein, had a successful year despite a number of tough boardroom battles, with a source telling Activist Insight that the fund was happy when companies took credit for the activist’s suggestions. That was the pattern in a number of cases, including Ashland, QEP Resources and Safeway, which all sold or hived off business divisions. A proxy contest at Agrium marked the first time that JANA had ever gone all the way to a shareholder vote, where its nominees were defeated (though the activist can point to a number of changes announced by the issuer that JANA called for initially).


One issue that forced JANA to take a public stand was criticism of activists remunerating board nominees. The activist says that company by-laws preventing activists from paying their nominees makes it harder to find good candidates and has made clear its intention to oppose the new changes.


8. There was little new action for Mario Gabelli’s GAMCO Asset Management in 2013, with relatively few new investments above the reporting threshold. However, the activist investor scored high for the number of changes it sought and achieved in 2013 and for the successful track record of those stocks. GAMCO is known for its focus on corporate governance and has tried to remove several poison pills in the past year, albeit with limited success to date.


The run-up to 2014’s proxy season suggests next year will be equally busy, with proxy contests likely at Sevcon and Telephone & Data Systems, and public letters recently sent to the boards of Griffin Land & Nurseries and Superior Industries International.


9. Very little seemed to go right for Bill Ackman’s Pershing Square Capital Management in 2013, although stock price increases from several successful engagements the year before were perhaps the activist’s saving grace. Ackman’s disastrous effort to turn around JC Penney along with his public disagreement with everyone from Carl Icahn and Dan Loeb to George Soros over his Herbalife short caused the activist’s “Follower Returns” to be significantly


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lower than in previous years. Even so, Ackman hasn’t been hiding away. Following a $2.2 billion investment in Air Products and Chemicals, Ackman promised, “to go to the ends of the earth” to prove his detractors wrong on Herbalife. Pershing Square has also bet $435 million on the recovery of Freddie Mac and Fannie Mae, for reasons yet to be fully explained, and can still cash in its winnings from what was a successful campaign at Canadian Pacific Railway last year.


10. Led by Phil Goldstein and Steven Samuels, Bulldog Investors has long specialised in antagonising closed-end funds. In a conversation with Activist Insight, Goldstein admitted that despite it becoming easier for the firm to secure the changes it wants because it has gained in credibility and bargaining skills, 2013 was a good time to launch proxy contests at Firsthand Technology Value Fund and Javelin Mortgage Investment. At the year’s end, Bulldog had already settled the latter fight, accepting an enhanced share repurchase programme as a compromise. Despite its investments being mostly on the small side, the breadth of Bulldog’s portfolio and frequent successes earn the activist a place in our Top 10.


RIDING A RISING TIDE An interview with Marc Weingarten and David E. Rosewater of Schulte Roth & Zabel LLP


Schulte Roth & Zabel has built one of the busiest and most high-profile shareholder activism practices in the legal world. Activist Insight interviews partners Marc Weingarten and David E. Rosewater on their experience of activism.


One of the themes of this review has been that, while activist investing has gathered pace over a number of years, the services industry supporting activists has, at times, lagged behind the growth in defense services. In some industries, including the legal profession, representing activists has been a stigma to be avoided, especially as it was likely to cost firms corporate clients. A couple of law firms have bucked that trend, however, with Schulte Roth & Zabel perhaps the most prominent. The firm’s Shareholder Activism practice, started by Marc Weingarten in the mid-2000s, was a natural extension of its hedge fund practice and a raft of personal contacts. Weingarten says he learned the craft working for Asher Adelman in the 1980s. “One of Adelman’s right-hand guys at the time was Barry Rosenstein [who went on to found activist hedge fund JANA Partners], and we’d worked with Icahn on occasions,” says Weingarten. “So when shareholder activism came to the fore just before the crash, I knew a lot of people and it made sense to get into this area.”


David E. Rosewater, who made partner at Schulte Roth & Zabel in 2004, started working with Weingarten around this time. Having worked on big campaigns such as CNET, CSX, Sandridge Energy and Stillwater Mining Company, he is now regularly referred to as a rising star in the activism field. However, the first few years of the practice did not see a consistent growth in activism. Says Rosewater, “Activism started to grow in 2006/7, and hasn’t necessarily grown year-on-year straight through. As with many other strategies, it was set back a bit by the crisis because it’s an illiquid strategy and when there were redemption issues it caused issues for funds that did activism. The illiquidity of it created redemption issues during the 2008 financial crisis.”


A sea-change A couple of years later, activist activity began to increase, and money began to flow into activist funds in search of uncorrelated returns. Absent an economic rebound, activism has been attracting a growing amount of attention. As Weingarten says, “Institutional investors have so much under management they basically own the market. Activism is another avenue to create value – they already own all the stocks, so instead of shifting their money between stocks, they are now happy to support activists to create value in a stock.”


Another important change was the crackdown on insider trading. Before Regulation FD was introduced in 2000 to address selective disclosure, institutional shareholders had an advantage to be gained from currying favour with management. Now, all shareholders have the same information, and the likes of Blackrock and Vanguard are no longer tied to company boards.


The result has been a sea-change in the perception of shareholder activism. Rosewater says, “Institutional, or passive shareholders as you’ve called them, are increasingly willing to support shareholders and in some cases not-so-passively. There are cases in which institutions are willing to provide capital to an activist and there are examples of institutions seeking out an activist to act on a particular situation where the institution isn’t capable or prepared to act itself.” Does that mean institutional shareholders might approach Schulte Roth & Zabel’s Shareholder Activism practice in search of an activist with management-busting expertise? “That could happen.”


A bigger tide Since 2010, activism has grown in volume and in the size and notoriety of its targets. Schulte Roth & Zabel’s clients range from massive, global investors like JANA Partners, Elliott Management and The Children’s Investment Fund (TCI), to smaller US players like Clinton Group and Sandell Asset


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