THE WALL STREET
Contending With Activist Investors
Strategies to Deal With Shareholders, Who Are More Assertive Since
Biglari, left, who owns about 20% of the Cracker Barrel
restaurant chain, has clashed with CEO Sandra Cochran. The
investor says his experience turning around Steak ’n Shake would
make him a strong board member.
Steak ‘n Shake/Associated Press (Biglari); Cracker Barrel
Nov. 25, 2014 6:25
Irwin Simon, chief executive of
Hain Celestial Group
Inc., thought he was getting a prank
“There’s a guy named
on the phone,” his assistant told him
that day in 2010. It wasn’t a joke.
The famous activist investor had taken a
12% stake in the natural-foods company and wanted to talk.
“After that, it became like a circus,”
Mr. Simon says. Suppliers bombarded him with anxious inquiries.
Customers worried that Hain’s products wouldn’t make it to shelves.
Bankers and lawyers pitched their services. “It was kind of like an
earthquake went through the company,” he says.
Mr. Icahn’s arrival inducted Mr. Simon
into a growing club: CEOs forced to contend with activist investors.
Activists, who typically buy stakes in
companies and press for strategic and financial changes they think
will drive a stock higher, are busier
than at any time since the financial crisis. In the first nine months
of this year, they launched 238 campaigns seeking changes at
companies, the most since the same period of 2008, according to
FactSet SharkWatch, a data tracker.
They also are winning more often. So far
this year, they scored at least a partial victory in 72% of campaigns
for board seats, up from 57% in 2008, according to the data tracker.
It is a sign of their increasing support
from shareholders, who have become more assertive in challenging CEOs
since the financial crisis. Activists have successfully shaken up
numerous companies and, on average, boosted stock prices, increasing
their appeal and drawing a flood of investor money to fuel even more
How chief executives respond has become
a new measure of their mettle. Managing an activist can affect their
company’s shares, their reputations and their job security. When
boards search for new chiefs, recruiters say, they now regularly ask:
How would you handle an activist while still pursuing the company’s
Some CEOs have passed the test.
Inc. ’s Reed
Hastings earned the respect of Mr. Icahn, who in 2012 wanted the
online video company to sell itself but dropped the idea after
Mr. Hastings showed
him a private screening of its soon-to-debut series “House of Cards.”
That helped convince Mr. Icahn that the company’s future was bright.
The stock’s gains since then have earned him nearly $2 billion.
Other CEOs found the door.
Clarence Otis Jr. of
announced his retirement in July under criticism from investment firm
Starboard Value LP. In 2012,
Inc. after investor
Dan Loeb ’s firm revealed an error on his résumé. Last week, William
Ruprecht, the long-time CEO of auction house
, said he would step down, six months
after Mr. Loeb questioned the company’s strategy and joined the board.
Mr. Otis said it was the right time for
change after a 10-year tenure. Mr. Thompson said he left for personal
reasons. Mr. Ruprecht said Sotheby’s was “well-positioned for the next
Today’s activists stand in contrast to
their predecessors in the 1980s: corporate raiders who would emerge
with big stakes and tough talk, making dramatic attempts to buy
targets with debt-fueled offers. They often were derided as bullies
looking to turn a quick profit by getting companies sold or cashing
out their stakes in exclusive deals with the companies.
Increasingly, activists are offering
more ideas about a company’s future. They often seek board seats and
try to persuade management and other shareholders that their strategy
for a company is superior. Even some corporate defenders say activists
these days are more informed about companies and industries. Though
activists remain controversial, and still sometimes push to sell a
company quickly, their successes in creating value have
shareholders’ expectations that chief executives engage
As a result, CEOs now prepare
exhaustively. Advisers compile lists of activists’ names, in case one
approaches at a conference. They write fake “white papers” about
companies’ shortcomings to highlight corporate weaknesses antagonists
could flag. Some role-play famous activists at board dinners.
These fire drills help, but little can
prepare someone for the real-life scenario, executives say.
“Such reactive procedural moves are like
the old ‘duck and cover’ civil-defense drills: They give the illusion
of safety without providing it,” Boston Consulting Group advised
clients this year.
A standard playbook of first steps has
emerged for chief executives confronted with an activist. They form
SWAT teams, including the chief financial officer and, often,
independent board members, to plot strategy. They hire bankers to pore
over shareholder and trading records to see who is piling into the
company’s stock and likely to back the activist. They weigh potential
responses, such as using a “poison pill,” a controversial tactic that
blocks the activist from buying too big a position.
Lawyers nitpick activists’ letters, a
process some call “bed bugging,” to find potentially misleading
statements they can flag to regulators. For instance,
Inc., the maker of
Botox, raised concerns with regulators about filings from activist
Inc., which together had been trying to
buy the company. Allergan wanted regulators to scrutinize their
unusual arrangement, in which Mr. Ackman purchased Allergan shares
knowing a lucrative takeover offer was coming. Mr. Ackman, Valeant and
legal experts say it was legal. Regulators haven’t commented.
Earlier this month, Allergan thwarted
Valeant’s bid by agreeing to be acquired by Actavis PLC, a
Dublin-based seller of generic medicines, in a $66 billion deal that
would be the year’s biggest. Still, even though
Mr. Ackman didn’t get
the deal he expected, he is in line to make about $2.2 billion on his
showing how activists often can make money even if their specific
ideas are rejected.
Beyond the basics, the game plan falls
largely to the CEO. The experiences of two of them— Sandra Cochran at
Cracker Barrel Old
Inc. and Mr. Simon at Hain—offer
contrasting portraits of how to handle an activist.
When Ms. Cochran took the reins at
Cracker Barrel in September 2011, she was charged with returning the
casual-dining chain to strength after two disappointing quarters. She
had a six-point plan, including highlighting Cracker Barrel’s
made-from-scratch cooking in a new marketing push, refining the menu
to adjust to lower consumer spending, cutting restaurant costs and
bringing new blood onto the board.
Her first day on the job, Sardar Biglari,
owner of about 9% of the company at the time, notified Cracker Barrel
he would fight for board seats. He argued that his experience turning
around burger chain Steak ’n Shake would make him a strong board
member. Investor adviser Glass Lewis & Co. agreed he deserved a spot.
Executives stood firm against him. Ms.
Cochran and finance chief Lawrence Hyatt hit the road for several
weeks ahead of the shareholder vote, meeting investors and proxy
advisers to promote her plan and warn against jeopardizing early
results. She said there already were new board members and that Mr.
Biglari was solely bent on taking control.
Ms. Cochran prevailed, keeping Mr.
Biglari off the board. But unlike many activists, he didn’t go away
after the loss. He soon doubled his stake to nearly 20% and went on to
pursue three more campaigns aimed at forcing board change. He has
repeatedly criticized Ms. Cochran’s strategy and pressed for moves
such as opening restaurants abroad and selling real estate, advice she
Her battles with Mr. Biglari have made
headlines in Tennessee, where the company is based, prompting
discussion among parents on the sidelines of her children’s lacrosse
games. One day, her son came home from high school with inquiries of
his own: Mr. Biglari’s campaign was the subject of his economics
Throughout the conflict, Ms. Cochran has
stuck to what advisers say is one of the best defenses: a clearly
defined and well-articulated strategy. She keeps talk of Mr. Biglari
to a minimum in meetings with executives, one of whom has a Google
Alert for the activist to keep tabs on what he does outside Cracker
Barrel. “I work very hard to keep it from distracting the management
team,” she says.
Simon, left, chief of natural-foods company Hain Celestial,
eventually developed a working relationship with investor Carl
Bloomberg News (SImon); Reuters (Icahn)
Meanwhile, some of Mr. Biglari’s actions
alienated executives and board members. He uses sharp language and
often hangs up on them, according to people familiar with the calls.
And his holding company recently bought the publisher of racy men’s
magazine Maxim, raising eyebrows at Cracker Barrel, which doesn’t
serve alcohol and strives to project a folksy, family-friendly image.
Mr. Biglari declined repeated requests
for an interview. He has said he believes as a holder of 20% he has a
right to a board seat and that the company’s brand should earn even
better returns than it has.
The company’s improving stock price has
strengthened Ms. Cochran’s hand. Since she took over as CEO, Cracker
Barrel’s total return is about 260% including dividends, nearly triple
the S&P 500’s 92%. Mr. Biglari’s stake, which he has said cost him
about $241 million to build, is now worth $589 million.
This spring, Mr. Biglari called a
special meeting to try to force a sale and suggested he would like to
buy Cracker Barrel—after saying for years he wasn’t interested in
doing so. Investors, already well-versed in the arguments, told Ms.
Cochran and Mr. Hyatt there was no need to meet with them in person to
make their case.
Glass Lewis, which hadn’t backed Mr.
Biglari since his first push for board seats, delivered particularly
harsh words this time. “Biglari asserts in its primary proxy filing
that the incumbent board is ‘out of touch with reality,’ a sweeping
and perplexing conclusion we find grates coarsely against the sobering
realities of Biglari’s own success,” the proxy adviser wrote.
special meeting, in
April, 93% of shares that voted, excluding Mr. Biglari’s, rejected his
Tuesday, Cracker Barrel stock hit an
all-time high as it topped expectations for the fiscal first quarter
and raised its guidance for the year.
Still, despite Ms. Cochran’s successes,
she can’t breathe easily: Mr. Biglari still owns one-fifth of the
At Hain, the target of Mr. Icahn, Mr.
Simon took a different tack. He says he got “scared” as he studied
other companies that faced the activist. “I didn’t want my employees
coming to work every day worried the company was going to be broken up
or sold,” says Mr. Simon, the company’s founder. “I didn’t want my
customers worried. ‘What’s going to happen to Hain?’ ”
Mr. Simon says he was determined not to
make Mr. Icahn the enemy or distract the company with an acrimonious
fight. Rejecting advice from bankers and lawyers, he decided to attend
his first meeting with Mr. Icahn alone. The two dined at Mr. Icahn’s
Park Avenue apartment in New York, where the activist raised concerns
about costs and compensation, but expressed optimism about the
Soon after, Mr. Simon granted Mr. Icahn
two board seats, including a position on the committee that determined
the CEO’s pay. He says he sought Mr. Icahn’s ideas and turned to the
activist’s board members for advice on acquisitions. The two had
dinner at least three times a year, either at the New York apartment
or Mr. Icahn’s house in the Hamptons on Long Island.
Still, tension remained. Mr. Icahn,
known for making late-night phone calls, would ring Mr. Simon at 11
p.m. and talk for hours about lowering costs such as insurance rates
and audit expenses. Sometimes, he pressed Mr. Simon to sell the
“I’m not doing it. I’m not doing it,”
Mr. Simon says he would reply.
Mr. Icahn told Mr. Simon he could be
paid well, but to take his rewards in shares so that he got rich if
other shareholders did too. In 2012, Mr. Simon’s contract was up for
renewal and the sides negotiated a new one: Mr. Simon gave up a yearly
grant of stock options and instead received a smaller one-time bunch
of restricted stock that had both performance and time hurdles.
They developed a mutual respect, the men
say. But Mr. Simon knew Mr. Icahn, who continued buying more Hain
shares, kept a close eye on the stock price and that if Hain faltered,
the dynamic could change.
Instead, Hain’s revenue grew, natural
and organic foods became more popular and the stock market surged. The
company sported a $140 million profit for its fiscal year ended in
June, nearly five times the figure in 2010. Costs were 14.5% of total
revenue, down from 18.8% the year before Mr. Icahn arrived.
In October last year, the two toasted
each other at a dinner after Mr. Icahn sold his shares, which had
risen nearly fourfold since 2010, likely yielding the activist more
than $400 million in profits, according to filings.
Mr. Icahn praises Mr. Simon’s savvy read
on consumers and skill at spotting good acquisition targets. “I think
he had a passion,” Mr. Icahn says, adding that the CEO’s willingness
to work with him constructively helped.
For Mr. Simon, their relationship
changed his thinking. He recalled a customer who once asked him if he
would rather face a fate akin to being struck by lightning, or face
Carl Icahn. Initially, he might not have chosen Mr. Icahn, he says.
But “as a CEO, I learned a hell of a lot.”
David Benoit at