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Source: Financial Times, October 14, 2013 column



Carl Icahn and Daniel Loeb can’t be shut out

Andrew Hill

By Andrew Hill

There are many myths about activist investors and executives should not always try to shun them

If “staying active” is the key to a long life, Carl Icahn will probably live for years. At 77, the US investor is on a concerted activist campaign. He has tried (unsuccessfully) to disrupt Michael Dell’s buyout of the computer maker he founded, dined with Apple’s chief executive and pressed him to return cash to shareholders, and last week planted board members – including his son Brett – at Nuance, the Boston technology company that gives Apple’s Siri his/her voice.

But despite proclaiming in Forbes magazine in June that “What I Do Is Good for America”, Mr Icahn will struggle to lose his “corporate raider” label. When he revealed his activist stance at Nuance, analysts wrote: “Let the fireworks begin.” Board members and senior managers’ first reaction to an approach from Mr Icahn – or any hedge fund – is to take cover.

To say activism has a bad name among operating executives is not, however, true. It has many names. Mr Icahn’s is the quintessential American brand, marked by public fisticuffs and proxy battles. In the same style, Daniel Loeb of hedge fund Third Point did not write to Sotheby’s chief executive William Ruprecht this month to laud his management skills. But what if, instead of attacking Mr Ruprecht’s “extravagant” taste for “farm-to-table” organic delicacies, Mr Loeb was sitting at the table advising him to follow a different diet?

Until earlier this year, Mr Loeb was doing something similar as a director of Yahoo , proving that putting an engaged investor on the board can yield a positive outcome.

It is human nature that if a stranger comes up behind you and points out, however politely, that you could be doing a better job, you will bristle. Executives have enough to worry about without having to wrestle with back-seat drivers. But as Peter Hill, chairman of Alent, the UK-listed performance materials group, points out: “Second-guessing and questioning the executive is what boards should be doing: for me, it is one of the key dynamics.”

Mr Hill was a director of Cookson, now called Vesuvius, when two activist funds took stakes. One, Cevian Capital, with 20 per cent, later nominated a director to the board. When Alent spun off from Vesuvius last year, Cevian took a board seat there, too. Mr Hill thinks there is room for “responsible activists”. Advocates see them as “anchor shareholders” – a concept common in northern Europe – who encourage long-range stewardship of companies. Even in the US, funds such as ValueAct, which has a seat on the Microsoft board, are carving out a different style of activism.

The problem for companies deciding whether to let the barbarians into the boardroom is working out which sort is waiting at the gate. Dionysia Katelouzou of King’s College London has studied the battlefield outside the US and identified three categories of activism, from gentle to aggressive, and 13 subgroups of tactics, from “quiet persuasion” to full takeover.

Seeking board representation counts as “aggressive”. But her conclusion is similar to that of an earlier paper about the US: many assumptions about hedge fund activists are myths. They are not necessarily short-termists (39 per cent of her sample held on for more than three years), they do not generally seek control, and their aggressiveness is often overstated because journalists would rather write about a punch-up than a love-in. (Many dislike being called hedge funds, too, but that is another story.)

All investors act from self-interest. The question for the board is whether an activist’s interests are aligned with those of other shareholders, ensuring its director will speak for all investors, as non-executives should. Boards need to ask how such a director would behave if the activist’s strategy conflicted with the board’s collective will – in a bid, say. Finally, they need to know if they share the same definition of “long term”.

Executives often complain their institutional investors are uninformed, disengaged and swift to sell when the going gets tough. They should not ignore a knock on the door from investors that are well informed and committed.

Mr Icahn purrs about his altruistic and patriotic motives. Based on his record (which spans most categories of activism), it would obviously be rash for boards to assume he is now domesticated. But it would be equally odd for them to shut out all activists just because a few like to use their claws.

Copyright The Financial Times Limited 2013.



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