Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism by Jeff Gramm

Author:Jeff Gramm
Language: eng
Format: mobi
Publisher: HarperCollins
Published: 2016-02-22T14:00:00+00:00

7

Daniel Loeb and Hedge Fund Activism: The Shame Game

“It seems that Star Gas can only serve as your personal ‘honey pot’ from which to extract salary for yourself and family members, fees for your cronies and to insulate you from the numerous lawsuits that you personally face due to your prior alleged fabrications, misstatements and broken promises.”

—DANIEL LOEB, 2005

IN SEPTEMBER 2013, BILLIONAIRE investor Ron Burkle amended his Schedule 13D statement regarding his firm’s investment in a company called Morgans Hotel Group. The 13D is a form filed with the Securities and Exchange Commission—and made publicly available through the SEC’s website—that requires 5% shareholders of public companies to, among other things, report recent activity in the stock, their sources of capital, and the purpose of the transaction. Burkle’s amendment, his tenth such filing in Morgans since late 2009, included boilerplate passages filled with words like hereby and phrases like “such reduction is not determinable.” But the purpose of Burkle’s filing was not to update the data on his 13D. He reported no change in his holdings or the sources of his funds.1 Instead, Burkle amended the filing to include a letter he had written a few days earlier to Morgans Hotel’s chairman and CEO. He wrote, “Stop acting like a spoiled child. Stop playing with the company as though it’s your new toy. Get Morgans on the market and sell it to an appropriate buyer. It’s time to sell now for all stockholders benefit. Ask your mother to buy you something else.”2

When the hostile raider era ended in the late 1980s, management teams of public companies retrenched behind their poison pills and anti-takeover laws like Delaware Section 203. But they did not have free rein. Large institutional investors like CalPERS and TIAA-CREF were more attuned to corporate governance issues, and much less tolerant of underperforming managers. What’s more, a group of reformers, opportunists, and gunslingers—a new generation of Benjamin Grahams and Louis Wolfsons and Carl Icahns—emerged in the form of scrappy hedge fund managers with tactics reminiscent of the Proxyteers. What they lacked in capital they made up for with determination and audacity. When they did not have the leverage to influence a management team, they resorted to strongly worded public shamings to try to get their way. One of their best weapons was the pen, and they used the 13D to air their grievances to the rest of the market and win the support of other shareholders. Their methods turned out to be powerful, driving business headlines and shaking up the executive suites of some of America’s most iconic companies. Even superstar corporate raiders like Carl Icahn and Nelson Peltz would soon join their ranks.

Hedge fund is a vestigial term that Fortune magazine’s Carol Loomis used in 1966 to describe A. W. Jones’s long-short “hedged” investment partnership. It now applies to a variety of private investment funds that charge their investors an incentive fee carved out of the fund’s profits, in addition to a fee based on assets under management.

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