Jeffrey Smith of Starboard Value imagines a glass of freshly squeezed fruit juice when he makes a sizable new activist acquisition.
Smith left Wall Street in the mid-1990s to collaborate for his father's publicly listed juice company, The Fresh Juice Company, to help it conquer an instable share price and operational issues like underutilised production capability. Smith had previously earned an undergraduate degree from Wharton and spent a few years as an M&A banker at Societe Generale.
When Smith, a member of the New Money Masters in the June 29 Forbes Investment Guide, makes change-oriented holdings at Starboard, such as the renovation of Olive Garden operating company Darden Restaurants, the fixing up of once-struggling office supplies stores such as Office Depot, and even the strategy to unlock unique value at Yahoo, he pulls on his two years spent operating on a pullback of the juice business.
During that period, Smith assisted with three acquisitions and implemented a strategy to expand the retail and wholesale sales channels for the company that sold frozen and fresh juice. "Seeing the inner workings of a business and the inner workings of management as the business wanted to expand into its excess manufacturing capacity was a wonderful experience. We also increased wholesale and retail sales, and I gained practical experience managing a sales department, according to Smith.
In the end, Smith and his father were able to sell the business, and in 1998 they did so for $21 million to The Saratoga Beverage Group, which is now a division of The Naked Juice Company.
"Experiencing the sale of a firm and the method of making purchases firsthand has been really valuable to me. Compared to reading regarding management teams on print, it has helped me better comprehend their actions and motivations. It has given me the ability to comprehend what actually occurs on a daily basis, as compared to what investors may believe, and to appreciate and relate to both the management teams and the staff of a running organisation, according to Smith.
Smith decided to join investment manager Ramius Capital Group shortly after The Fresh Juice Company went bankrupt, and by 2002, he was in charge of the company's activist strategy. Back then, shareholder activism didn't garner the same attention as it does now, as funds target variations at some of the biggest companies in the country, including PepsiCo, Apple, DuPont, and Microsoft.
Activist assets managed by activists were probably only a few billion dollars in the 2000s. Following that, accounting scandals like those involving Enron, WorldCom, and Adelphia showed investors shouldn't have complete faith in management. In the years thereafter, investors such as Smith, William Ackman of Pershing Square, Nelson Peltz of Trian, Jeffrey Ubben of ValueAct, Daniel Loeb, as well as the cynical Carl Icahn have significantly altered the operations of well-known firms.
According to a JPMorgan analysis from January, the assets under management in the activist market have increased from $36 billion to significantly more than $100 billion since 2009. And don't anticipate a slowdown in that anytime in the near future. Indeed, according to Smith, shareholder activism is now so commonplace that it ought to be credited for the more than six-year bull market in American stocks.
"When you speak about a few of the developments that have occurred in the stock market and it being usually in a bull market after 2009, I think some part of the success is due to the activists have indeed been engaged," says Smith.
"I know there are several businesses now paying advisers to bring to the management and board to highlight what an activist would say to us," the speaker said. These kinds of inquiries are assisting businesses in becoming their own activists. It also implies that the wheels of change are in motion long before the fund is given a seat at the table when Starboard's thoughts of change develop into a full-fledged activist campaign, whether due to disagreement over the best course of action or for other reasons.
Smith claims that when an activist joins the team, "there are always decent people working in underperforming firms who are equally upset and who want the company to do more and it is empowering, it is exhilarating. When we cast a light on the firm, he continues, anyone who is dissatisfied and has suggestions for how a company may be operated better will be faced with less opposition on those ideas."
He cites Darden Restaurants as a prime illustration.
Starboard had submitted hundreds of pages of information about how the driver of Olive Garden and Longhorn Steakhouse could increase its earnings and extract more value from its company resources, like real estate, by the time it spearheaded a shareholder campaign to remove the board of directors. When Starboard entered the boardroom, it discovered that the business had previously made improvements to its supply chain management, marketing expenditures, and cost reductions on non-food goods including tablecloths, printed menus, and household cleaners.
Following the swift removal of Darden's entire board, a first for a business of that size, the company's new management was able to set a goal of $100 million in annualised cost savings.
Smith provided Forbes with some general investing tips. For those who are unaware, Starboard's assets have increased by about $4 billion from 2011. Since 2002, the company has generated returns of 16.2% on average annually, and 84% of its activist efforts have been lucrative. It has proposed a large number of directors for corporate boards.
If macroeconomic news have no bearing on the companies you are investing in, don't let them terrify you.
Starboard has recently used the turbulence in the Eurozone and concerns about a Greek contagion as a chance to make fresh activist investments. "It is simply irrelevant whether individuals choose to eat at Olive Garden or shop at Office Depot whether or not Greece may not be a member of the Euro. We will be really happy business owners as long as you are investing in firms at fair multiples of their pro forma revenue flows - pro forma for adjustments that we understand we can make "Smith says.
To become a successful investor, you shouldn't need a Wharton education.
Starboard, which was founded by Mark Mitchell and Peter Feld as well, gives priority to applicants who are passionate and competitive. Smith explains, "We seek for passion; you have to enjoy what you do." You need competition, he continues, "some individuals miss that."
Advisory from Jeffrey Smith
Pay-It-Forward Advice: Perform your research. Smith advises, "If you can be easily shook out of an asset, you don't comprehend it well enough." If losing money on an investment doesn't concern you, there may be another issue, he continues.
Terrorism and global turmoil are the main concerns. Things become challenging, according to turnaround guru Smith, if it begins to influence consumer behaviour and damage corporate foundations. He has one of the biggest hedges against a stock market index of any major activist investor: a put contract equal to 10 million shares against the iShares Russell 2000 Index ETF with a notional value of $1.26 billion.
Best Idea: Yahoo (YHOO). If you assume the spinoff of its 15% stake in Alibaba, Yahoo stock is valued at less than zero. "Yahoo's worth more than nothing," he says.
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