For those keeping up with corporate dealings and transactions, you have seen a lot of talk about shareholder activism. Specifically, Starboard Value has been all over the news regarding their success in getting companies to act in a particular way. So who is Starboard Value, and what is a shareholder activist?
Shareholder activism is a corporate takeover strategy that occurs when a person uses their equity stake in a company in order to promote changes in the corporation. Activists can put pressure on their targets either privately or publicly in order to urge the targets to make changes. This activism can take many forms including proxy battles, publicity campaigns, shareholder resolutions, and litigation and negotiations with target management. Examples of changes that an activist would seek are: pushing companies into pursuing acquisitions of other companies, split-ups, and other corporate restructuring. In 2014, activists targeted three hundred and forty-four companies. These numbers are expected to increase in 2015. In addition to Starboard Value, prominent activists include Bill Ackman of Pershing Square, Carl Ican of Ican Capital, and Daniel Loeb of Third Point LLC.
Starboard Value (“Starboard”) is a hedge fund known for investing in undervalued companies and creating opportunities to add value to the target company for the benefit of all shareholders. Recently, Starboard has been taking on bigger targets. In 2015, Starboard has already been in the news for their success in a few major activist campaigns with Yahoo, Staples, and Office Depot.
In the fall, Starboard urged Yahoo in a public letter to divest their shares in the Alibaba Group in a tax efficient manner and warned Yahoo that the use of the funds received from the divestiture should not be used to fund acquisitions. Starboard also urged Yahoo to merge with AOL. Starboard has only disclosed that they have a .08% in Yahoo and about a 2.4% stake in AOL. Lastly, Starboard urged Yahoo to spin off Yahoo Japan. After months of pressure from Starboard, Yahoo announced in January their plan to divest their stake of Alibaba during the 4th quarter of this year. However, Yahoo did not spin off Yahoo Japan, nor did the company enter into a merger with AOL.
In December, Starboard began their campaign for a merger between Staples and Office Depot. Starboard gained a 6% stake in Staples and had about a 10% stake in Office Depot. Recently, Starboard wrote an open letter in the Wall Street Journal arguing that the merger would lead to cost savings and included a threat of a leadership change if a merger did not take place. In addition, Starboard indicated that they were willing to engage in a proxy battle if necessary. On February 4th Staples and Office Depot announced their merger. The merger of the two largest office supply retailers would result in Staples purchasing Office Depot for 6.3 billion dollars. However, both companies are stating that this deal was already being discussed prior to Starboard’s acquisition of the 6% stake in Staples.
Another famous activist campaign led by Starboard dealt with the ousting of Darden Restaurants’ entire board of directors. Darden Restaurants is the parent company to a family of restaurants including Olive Garden and Longhorn Steakhouse. Starboard requested the dismissal of the board due to the board’s “contempt of shareholder’s interest” after the directors of Darden sold Red Lobster against shareholder objection. During their campaign, Starboard acknowledged the shortcomings of Darden Restaurants in a 300-page presentation where Starboard famously critiqued Olive Garden for under salting the pasta served to customers. The shareholders of Darden then elected all of the Starboard nominations for Darden’s directors, which included appointing Jeffery Smith of Starboard as the chairman.
Are activists good or bad for the benefit of the companies affected? Activists seem to be beneficial to the companies due to the increase in value that can occur after the target announces the change. Activists can bring about new change and new leadership to the organization as seen above. However, some opponents argue that the use of activism is temporary and does not account for the long-term life of the companies. The prevailing view is that there is no answer to the question because the facts differ depending on the particular case. While there are great benefits to the companies, without knowing the long-term effects of these changes, it is hard to determine whether shareholder activists are beneficial to the affected companies.
Published February 18, 2015