This podcast was recorded on Aug. 30, 2016.
Alison Southwick: Yeah. Let's talk about activist hedge funds, because those are fun. They put the “fun” in hedge funds.
Ron Gross: Wow! Both of my funds are activist, so I'm happy to talk about that. Activist investors are investors that either own a stock and have identified some things that the company's not doing well, that if they just did, the stock would likely go up in value. Or, these are funds that actually look for companies to buy that they think have a problem, and if they bought it and then demanded some changes be made, the stock would go up in value.
Carl Icahn is probably one of the most famous. In more recent years, Bill Ackman. Nelson Peltz. Starboard Value. Jana Partners. These are all hedge funds that are pushing for value-creating endeavors to be pursued by these companies, but they're also interested in corporate governance issues. Making sure the boards of directors are doing what the boards of directors should be doing. Making sure that the CEO and the chairman roles are split. Making sure that compensation is appropriate for the C-level executives. So there's a lot of corporate governance associated with activists.
But the other side of that strategy is you'll see them saying, “You should sell this piece of your company,” or “You should acquire that other company,” or “You should start to pay a dividend,” or “You should buy back stock.” These are some of the more common things that activists will demand, and if need be, you'll often see them running a proxy contest, which is where they ask for seats on the board of directors so they can kind of push their initiatives through, and sometimes that can get nasty. And the proxy fights get a little heated, and you win or you lose, but it's always interesting.
Southwick: What's one of the more recent high-profile cases? I feel like — was Valeant one of them, and then there was …
Gross: Yahoo! was pretty big.
Southwick: Oh, really?
Gross: Starboard Value. Jeffrey Smith over at Starboard was demanding that Yahoo! sell itself for the most part, or create value there, and they were trying to push through. They were trying to put themselves on the board, which they were successful at doing, I believe. And that was pretty high profile. Any time there's a large company that gets an activist, you'll see it in the press. I typically went after small- and micro-cap investments, so those don't typically make the news.
Brokamp: Were you ever on the board?
Gross: We used to put representatives on the board, but I never personally went on boards.
Brokamp: I always think that must be very uncomfortable to go into those meetings, because the activist investors basically are disagreeing with the CEO…
Brokamp: And the chairman, and saying, “You're not doing a good enough job.”
Gross: And sometimes you end up kicking the CEO out as a result. But in the beginning, those meetings are pretty contentious and uncomfortable, but once, usually the company says, “Fine, let's just roll up our sleeves and get this done and create value,” things tend to calm down. But I always think behind the scenes, there's always still that animosity.
Brokamp: Which, by the way, I think is how Warren Buffett took over Berkshire Hathaway. It was a textile manufacturer, right?
Brokamp: And he just accumulated shares, went in, and fired the president. Eventually they had to close all the mills. I think the last mill was closed in 1985. Actually, Warren Buffett has said Berkshire Hathaway, the actual company, was one of his worst …
Brokamp: …investments of all time, but then he just started using it as a holding company.
Gross: And the whole activism — as I said earlier, there's kind of two ways to look at it. If you're an owner of a company, an owner of stock, then you have every right as a shareholder to say, “I don't like what's going on here. I think these changes should be made.” These are public companies, right? They're not private, and if the board and the CEOs are running them as if they're private companies, that's not appropriate.
It's kind of another thing to identify a company first and say, “That company has trouble. I'm going to buy it now and then make some noise.” It's kind of two different things. You can end up in the same place, but one is you're being a conscientious, vocal shareholder, and the other is you're being an opportunistic hedge fund manager. Two different things.
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