By Soyoung Kim and Olivia Oran
NEW YORK, March 17 When Barington Capital Group
in October reported a stake of more than 2 percent in Darden
Restaurants Inc with a vow to shake up the company,
another investment firm was caught off guard.
Starboard Value LP, which takes stakes in companies that it
perceives to be undervalued with the hopes of making changes,
had studied the restaurant chain for six months as a potential
target and was waiting for the right moment to pounce.
But news of Barington's investment sent stocks sharply
higher that month, forcing Starboard to wait another two months
until shares fell back. In December, it went public with its 5.6
percent position just after Darden reported weak earnings.
A few months prior to that, an activist fund was preparing
to go public with proposals to shake up Aeropostale Inc
and was amassing a stake, only to learn that Sycamore Partners
had taken an 8 percent stake in the teen clothing retailer.
Sycamore's disclosure sent stocks surging nearly 20 percent
on the day of the announcement, making it expensive for the
activist fund to buy more shares. The fund, which asked not to
be identified for this article, passed on a campaign.
The examples show how investors are increasingly bumping
into one another in corporate campaigns, as more funds are
starting to follow the playbook of aggressive shareholders such
as Carl Icahn and Bill Ackman, who use their stock positions to
urge companies to sell, break up, buy back shares or oust
Investors and their lawyers say that it's getting tougher to
find easy targets as investors are chasing the same "low-hanging
fruit" - companies that have poor corporate governance or
performance and are vulnerable to calls for change.
"There's only so many companies that are undervalued and a
lot of people are looking at the same screen and the same
performance criteria," said Steve Wolosky, a partner at law firm
Olshan Frome Wolosky LLP.
John Studzinski, who leads the advisory arm of Blackstone
Group LP, estimates that almost 20 percent of the S&P 500
companies have already had some type of activist involvement.
The strength of stock markets -- the S&P rose 30 percent in
2013 -- means there are fewer cheap stocks to buy. Moreover,
companies, realizing that it's too late when activists show up
on their doorsteps, are proactively taking steps such as
breaking up the company or boosting buybacks. That removes some
potential for activist intervention, lawyers and bankers say.
They say that with fewer obvious targets where activists can
get in and out for a quick fix, activists will inevitably go
after some of the better-performing companies in order to deploy
capital. Activist returns, which handily outperformed those of
traditional hedge funds in recent years, may take a hit if
complicated corporate attacks start to produce mixed results.
For the companies themselves, the consequence of multiple
agitators could mean a more costly and time-consuming battle, a
distraction from running day-to-day operations, as well as
greater fees for legal and defense advisors.
"It's a tough message for a board of a management team to
deny something when multiple sophisticated investors are saying
'this is what the problem is and this is why the market is
valuing you incorrectly'," said Philip Larrieu, a senior
investment officer at the California State Teachers Retirement
In addition to Darden, others who have fended off at least
two activist investors in the stock include Juniper Networks Inc
, where both Elliott Management Corp and Jana Partners
LLC reported stakes, and Sotheby's, which is under the
scrutiny of Third Point LLC and Marcato Capital Management LP.
Emulex Corp and Compuware Corp have three
activist funds involved in the stock. In the last two weeks
alone, at least three U.S. companies -- Aarons Inc, BJ's
Restaurants Inc and ALCO Stores Inc -- saw two
different investor groups nominate competing slates to their
Competition for the same targets is spurred in large part by
the sheer number of investors increasingly willing to use
activism and the ever-growing warchest that activist funds can
In 2013, activist hedge funds added nearly $5.3 billion in
net asset inflows, up sharply from $2.9 billion in the previous
year and the most since 2006, according to data compiled by
Hedge Fund Research.
Total assets in activist funds - a small slice of all
hedge-funds assets - stood at $93 billion at the end of 2013, an
all-time high and up 42 percent from the prior year, the data
Some of that rush of money is performance chasing. On
average, the roughly 60 funds tracked by HFR that specialize in
activist investing returned 16.6 percent in 2013. While that is
still less than the Standard & Poor's jump of roughly 30
percent, it is far better than the average hedge fund, which
returned 9.3 percent, HFR data showed.
These trends have supported a new crop of investors who left
funds like Icahn Enterprises LP and Ackman's Pershing Square
Capital Management to set up their own shops in recent years.
Further crowding the field, funds that have historically
preferred to stay under the radar are choosing to go public with
Last year, hedge fund TPG-Axon Capital led a successful
proxy fight against SandRidge Energy Corp, its only
second such public fight in its 8-year history, and First
Manhattan Co won a proxy battle at drugmaker Vivus Inc,
which marked one of its only two forays into activism in nearly
Rishi Bajaj, managing principal at activist investment firm
Altai Capital, thinks having multiple funds with similar
perspectives involved in the same company can sometimes help
because that gives them a larger percentage of shareholder base
that has an agenda of change.
But other times, investors are fighting it out to the
detriment of one another. In February, investment firm Voce
Capital Management LLC, which was seeking to nominate four
directors to ConMed Corp, lambasted the surgical device
maker for giving two board seats to another activist investor,
Coppersmith Capital, instead.
Voce went as far as questioning the qualification of the
Coopersmith directors. It pointed to the directors' track record
including their unsuccessful attempt at gaining board seats at
Alere Inc last year, saying "serious and troubling"
questions were raised about each candidate.
"Now companies have two different activists potentially to
try to satisfy, and those two activists may have different or
even competing objectives. If you satisfy one activist and
settle, the other one could keep coming at you," said Marc
Weingarten, head of the activism practice at law firm Schulte
Roth & Zabel LLP.
Blackstone's Studzinski said that if activists position
their campaign in a way where they will not step on each other's
toes, "one plus one could equal three."
When Keith Meister, Carl Icahn's one time right hand man,
set his sights on shaking up CommonWealth REIT a year
ago, he didn't know that he would soon have company in the form
of other hedge funds who were equally ready to fight over the
real estate investment trust's structure and high fees being
paid to its controlling family.
Meister's Corvex Management, working with Related Fund
Management, laid out its requests and a threat to remove the
board in a regulatory filing on Feb. 26, 2013. On the same day
Luxor Capital Group, already an investor, cheered Corvex's
actions in a news release.
Two weeks later Richard Perry's hedge fund, an occasional
activist, jumped in with its own 13-D filing, signaling activist
intentions. CommonWealth claimed that Corvex rounded up Luxor,
Perry and Marcato Capital Management to act as a group,
according to the fund's regulatory filing in June. Corvex had
never said it was working as a group with the investors, and
CommonWealth later dropped the claim.
A coordinated approach among activists could add pressures
on companies to make changes, potentially boosting returns for
Activists could "all bring their investing perspective,
providing a richer menu of intelligence and perspective,"
Studzinski said. "But they could also discredit each other's
argument and one plus one could equal one half."
Some institutional investors who invest in activist funds
say the increased crowdedness could result in a shakeout.
"Some activists may decide that this strategy is harder than
it looks and that it's not the right strategy for them to
pursue," said California State Teachers Retirement System's
Larrieu. "It's a lot of campaigning, making press calls,
presenting to investors and answering questions -- it's all a
lot harder than just running a portfolio."