By David Benoit
Starboard Value LP doesn't stand still. From giving cooking tips
to trying to buy a maker of 3-D movie glasses to playing matchmaker
for aging Internet giants, the hedge fund is one of the most active
of activist investors.
On Friday, it is expected to get its biggest taste of victory at
the annual meeting of Olive Garden parent Darden Restaurants Inc.
After a menu of assaults on Darden, from how it prepares pasta to
the sale of its Red Lobster seafood chain, Starboard is poised to
unseat the entire board, say people familiar with both sides of the
vote.
The vote would be just one check on its to-do list. Starboard
presses companies at a frenetic pace. The firm has launched 36
campaigns for change at companies since the start of 2011, more
than any activist that targets companies valued at more than $100
million, according to FactSet SharkWatch.
Take a one-week period in late September.
First, Starboard won two key endorsements from influential proxy
advisers in its campaign against Darden. The next morning it fired
off an opening salvo at its biggest target yet, Yahoo Inc.,
suggesting a merger with AOL Inc., a former Starboard target.
Five days later, Starboard offered $600 million to buy RealD
Inc., which makes technology and glasses for watching 3-D
movies.
Yahoo said it looked forward to discussions with Starboard and
RealD said it would review the offer.
Starboard's annual average return since its founding is 15.5%
through May, according to a person familiar with the matter. Since
the beginning of 2002, hedge funds tracked by HFR averaged 6.1% a
year.
While the 12-year-old firm hasn't always had the spotlight, it
has started pursuing bigger prey as its assets have soared from
$200 million to more than $3 billion. That is earning it
headlines.
From social media to late-night cable comedy, commentators
feasted last month on its 294-slide saucy attack on Darden. And the
likelihood Starboard will replace the entire board has the activist
community talking about a win some think could echo in board rooms
across the country.
"It's a game-changing victory," said Christopher Davis, a lawyer
who works with activists and isn't involved in this situation.
While activists increasingly win some board seats, securing even
a majority of the board is rare. Companies that have seen an
uprising that supplanted a full board have been smaller than
Darden's $6.6 billion market capitalization.
Success, though, isn't assured, and Starboard's biggest
investment is at stake. Starboard owns 8.8% of Darden's shares, or
about $575 million.
"The questions are going to be: one, can they turn it around?
And, two, are there going to be too many cooks in the kitchen?"
said Damien Park, a consultant on activism. "This kind of
operational turnaround is not easy to do."
Darden already has shown improvements, including releasing
better-than-expected September sales numbers last week.
Founded in 2002 as a unit of investment adviser Ramius,
Starboard spun off in 2011, led by Jeffrey Smith, Mark Mitchell and
Peter Feld. Their roles at Starboard hew closely to their own
experience from investment banks: Mr. Smith, 42 years, who worked
in mergers and acquisitions at Société Générale SA, is chief
executive and chief investment officer. Mr. Mitchell, 53, a former
top trader at BT Alex Brown Inc., is head of risk management and
trading. Mr. Feld, 35, a former investment-banking analyst at Bank
of America Corp., leads research. This year the firm named a fourth
partner, Gavin Molinelli.
Starboard typically arrives at a company with a detailed
operational plan to improve performance. But the firm sometimes
rankles management, as its specific ideas can imply current bosses
aren't doing a good job.
Starboard says opinions of it often change when it gets on a
company's board.
Richard Hill, who battled the firm as chairman and interim chief
executive of Tessera Technologies Inc., a semiconductor-technology
and imaging-technology company, is one example.
When Mr. Hill first met Starboard's Mr. Feld in 2013, he got
annoyed. He felt Starboard was saying they knew better than
management.
That set the tone for the fight over Tessera's board. Mr. Hill
worked to improve the operations while Starboard said its plan and
board nominees were better. Eventually, the sides settled. Mr. Hill
stayed on the board and a Starboard nominee became CEO.
Immediately, Mr. Hill's opinions of Starboard started changing,
he says. Mr. Feld, who joined the board, knew the business well, he
concluded. And Starboard's board nominees proved their independence
by pushing back against some of Mr. Feld's ideas.
Later, Starboard nominated Mr. Hill for the board at another
company.
Still, he harbors concerns that activist approaches don't always
help companies. For example, he says, he tells Mr. Feld he doesn't
think an activist would have let Steve Jobs take the risk to launch
the iPod at Apple Inc.
Starboard's letter to Yahoo focused on avoiding taxes on its
Asian assets, including its stake in Alibaba Group Holding Ltd.,
the freshly public Chinese e-commerce giant. Such positions make up
most of Yahoo's $40 billion market capitalization.
Starboard suggested Yahoo consider spinning off its legacy
operations that sell online advertising and merging them with AOL,
leaving the Asian assets at the current company.
With the idea, Starboard returned to the scene of the only
shareholder vote it lost, a 2012 fight with AOL.
But even then, Starboard walked away with a profit after AOL
shares jumped when it sold a set of patents. Starboard had
suggested such a sale.
"We measure success in terms of creating value," Mr. Smith has
said. "Winning and losing a proxy contest isn't the way to define
success."
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