Here’s a riddle to test your Wall Street savvy. What do Yahoo, Olive Garden and Staples have in common?
Answer: A hedge fund called Starboard Value LLP is having outsized influence over their futures.
Starboard is the big money behind some of the most significant deals in recent months, like Wednesday’s news that Staples is buying Office Depot for $6.3 billion or Yahoo’s announcement in late January that it would spin off its Alibaba stake valued at a whopping $40 billion. Both deals were, in many ways, at the behest of the hedge fund.
Launched in 2002, Starboard’s hallmark is so-called activist investing. That means it doesn’t just buy stakes in companies it thinks are undervalued and wait for the rest of the market to catch on. Instead, it buys shares in companies it believes have undervalued assets and then pressures management to do what it thinks will unlock that value.
Lately, the executives and directors at companies targeted by Starboard are proving quick to act when the fund lays on the pressure. It was only last month that Starboard called on Staples and Office Depot to merge, betting that they could save money and better compete against Amazon and Wal-Mart by combining operations. Staples, for its part, says it began talks to buy Office Depot last September.
Starboard had a 5.1 percent stake in Staples and a 10 percent stake in Office Depot, which it started buying back in 2013, when it was pushing a merger with OfficeMax. Staples’ stock (NASDAQ:SPLS) skyrocketed when rumors of the pending merger first broke Tuesday, although it fell back on the actual announcement Wednesday. Office Depot (NASDAQ:ODP) shares jumped about 10 percent on the rumor and have held those gains. That’s a tidy profit for Starboard.
Starboard doesn’t have a huge stake in Yahoo (that it has disclosed yet, anyway), but it nonetheless has had CEO Marissa Mayer squarely in its sites for months. Starboard has publicly pushed its plan for Yahoo to spin off its stake in Alibaba, sell its Yahoo Japan holding and then merge with AOL. Mayer may be hoping that the firm will leave her alone now that she’s agreed to sell the Alibaba stake. If Yahoo merged with AOL, it’s likely AOL’s CEO Tim Armstrong who would end up in the top job, not Mayer.
Management doesn’t always rush to do Starboard’s bidding, though. When it bought a 5.6 percent stake in Darden Restaurants (NYSE:DRI) in late 2013, Starboard wanted to spin off the restaurant operator’s real estate holdings into a separately traded company. But Darden management foiled that plan by selling Red Lobster, and its real estate with it.
Punishment was swift. Not only did Starboard sue, but it also led a proxy contest that resulted in all 12 Darden directors being replaced with Starboard’s own slate, which includes Starboard’s chief executive, Jeff Smith.
Starboard assets total about $3 billion, tiny in comparison to the market caps of some of the companies it targets. Nonetheless, it was recently ranked No. 1 in influence by research firm Activist Insight. That firm expects Starboard’s power to keep growing. “2014 has given Starboard the affirmation to be bolder still in years to come,” the report surmises. Perhaps not surprisingly, Smith was dubbed “The investor CEOs fear most” in a Fortune profile last December.
The question remains, however, as to whether Starboard is making the right calls for the companies it targets. It is possible (if not likely) that most corporate management teams — people with significant expertise in that industry — are better at plotting a long-term growth course than a group of outside shareholders.
Starboard, over time, will have to show that it picks spots where it can make better calls than the entrenched C-suite. Darden, so far, is a pretty compelling proof point. After treading water for years, the stock has climbed from $44 to $61 a share since last July.
That’s just one stock, though, and it’s too soon to tell for deals inked in the past month. Fortune notes the average activist fund was up only 4 percent vs. 13 percent for the broader market in 2014. This indicates a “gap between activists’ success in getting companies to do what they want and their subsequent investing performance.”
Over time, if that trend continues, activist investors’ ability to sway the C-suite will erode. But for now, the trend of activist investors having more say over corporate decision-making isn’t going away any time soon.
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