By David Benoit
Irwin Simon, chief executive of Hain Celestial Group Inc.,
thought he was getting a prank call.
"There's a guy named Carl Icahn on the phone," his assistant
told him that day in 2010. It wasn't a joke.
The famous activist investor had taken a 12% stake in the
natural-foods company and wanted to talk.
"After that, it became like a circus," Mr. Simon says. Suppliers
bombarded him with anxious inquiries. Customers worried that Hain's
products wouldn't make it to shelves. Bankers and lawyers pitched
their services. "It was kind of like an earthquake went through the
company," he says.
Mr. Icahn's arrival inducted Mr. Simon into a growing club: CEOs
forced to contend with activist investors.
Activists, who typically buy stakes in companies and press for
strategic and financial changes they think will drive a stock
higher, are busier than at any time since the financial crisis. In
the first nine months of this year, they launched 238 campaigns
seeking changes at companies, the most since the same period of
2008, according to FactSet SharkWatch, a data tracker.
They also are winning more often. So far this year, they scored
at least a partial victory in 72% of campaigns for board seats, up
from 57% in 2008, according to the data tracker.
It is a sign of their increasing support from shareholders, who
have become more assertive in challenging CEOs since the financial
crisis. Activists have successfully shaken up numerous companies
and, on average, boosted stock prices, increasing their appeal and
drawing a flood of investor money to fuel even more campaigns.
How chief executives respond has become a new measure of their
mettle. Managing an activist can affect their company's shares,
their reputations and their job security. When boards search for
new chiefs, recruiters say, they now regularly ask: How would you
handle an activist while still pursuing the company's strategy?
Some CEOs have passed the test. Netflix Inc.'s Reed Hastings
earned the respect of Mr. Icahn, who in 2012 wanted the online
video company to sell itself but dropped the idea after Mr.
Hastings showed him a private screening of its soon-to-debut series
"House of Cards." That helped convince Mr. Icahn that the company's
future was bright. The stock's gains since then have earned him
nearly $2 billion.
Other CEOs found the door. Clarence Otis Jr. of Darden
Restaurants Inc. announced his retirement in July under criticism
from investment firm Starboard Value LP. In 2012, Scott Thompson
exited Yahoo Inc. after investor Dan Loeb's firm revealed an error
on his résumé. Last week, William Ruprecht, the long-time CEO of
auction house Sotheby's, said he would step down, six months after
Mr. Loeb questioned the company's strategy and joined the
board.
Mr. Otis said it was the right time for change after a 10-year
tenure. Mr. Thompson said he left for personal reasons. Mr.
Ruprecht said Sotheby's was "well-positioned for the next
chapter."
Today's activists stand in contrast to their predecessors in the
1980s: corporate raiders who would emerge with big stakes and tough
talk, making dramatic attempts to buy targets with debt-fueled
offers. They often were derided as bullies looking to turn a quick
profit by getting companies sold or cashing out their stakes in
exclusive deals with the companies.
Increasingly, activists are offering more ideas about a
company's future. They often seek board seats and try to persuade
management and other shareholders that their strategy for a company
is superior. Even some corporate defenders say activists these days
are more informed about companies and industries. Though activists
remain controversial, and still sometimes push to sell a company
quickly, their successes in creating value have increased
shareholders' expectations that chief executives engage with
them.
As a result, CEOs now prepare exhaustively. Advisers compile
lists of activists' names, in case one approaches at a conference.
They write fake "white papers" about companies' shortcomings to
highlight corporate weaknesses antagonists could flag. Some
role-play famous activists at board dinners.
These fire drills help, but little can prepare someone for the
real-life scenario, executives say.
"Such reactive procedural moves are like the old 'duck and
cover' civil-defense drills: They give the illusion of safety
without providing it," Boston Consulting Group advised clients this
year.
A standard playbook of first steps has emerged for chief
executives confronted with an activist. They form SWAT teams,
including the chief financial officer and, often, independent board
members, to plot strategy. They hire bankers to pore over
shareholder and trading records to see who is piling into the
company's stock and likely to back the activist. They weigh
potential responses, such as using a "poison pill," a controversial
tactic that blocks the activist from buying too big a position.
Lawyers nitpick activists' letters, a process some call "bed
bugging," to find potentially misleading statements they can flag
to regulators. For instance, Allergan Inc., the maker of Botox,
raised concerns with regulators about filings from activist William
Ackman and Valeant Pharmaceuticals International Inc., which
together had been trying to buy the company. Allergan wanted
regulators to scrutinize their unusual arrangement, in which Mr.
Ackman purchased Allergan shares knowing a lucrative takeover offer
was coming. Mr. Ackman, Valeant and legal experts say it was legal.
Regulators haven't commented.
Earlier this month, Allergan thwarted Valeant's bid by agreeing
to be acquired by Actavis PLC, a Dublin-based seller of generic
medicines, in a $66 billion deal that would be the year's biggest.
Still, even though Mr. Ackman didn't get the deal he expected, he
is in line to make about $2.2 billion on his investment, showing
how activists often can make money even if their specific ideas are
rejected.
Beyond the basics, the game plan falls largely to the CEO. The
experiences of two of them-- Sandra Cochran at Cracker Barrel Old
Country Store Inc. and Mr. Simon at Hain--offer contrasting
portraits of how to handle an activist.
When Ms. Cochran took the reins at Cracker Barrel in September
2011, she was charged with returning the casual-dining chain to
strength after two disappointing quarters. She had a six-point
plan, including highlighting Cracker Barrel's made-from-scratch
cooking in a new marketing push, refining the menu to adjust to
lower consumer spending, cutting restaurant costs and bringing new
blood onto the board.
Her first day on the job, Sardar Biglari, owner of about 9% of
the company at the time, notified Cracker Barrel he would fight for
board seats. He argued that his experience turning around burger
chain Steak 'n Shake would make him a strong board member. Investor
adviser Glass Lewis & Co. agreed he deserved a spot.
Executives stood firm against him. Ms. Cochran and finance chief
Lawrence Hyatt hit the road for several weeks ahead of the
shareholder vote, meeting investors and proxy advisers to promote
her plan and warn against jeopardizing early results. She said
there already were new board members and that Mr. Biglari was
solely bent on taking control.
Ms. Cochran prevailed, keeping Mr. Biglari off the board. But
unlike many activists, he didn't go away after the loss. He soon
doubled his stake to nearly 20% and went on to pursue three more
campaigns aimed at forcing board change. He has repeatedly
criticized Ms. Cochran's strategy and pressed for moves such as
opening restaurants abroad and selling real estate, advice she
rejected.
Her battles with Mr. Biglari have made headlines in Tennessee,
where the company is based, prompting discussion among parents on
the sidelines of her children's lacrosse games. One day, her son
came home from high school with inquiries of his own: Mr. Biglari's
campaign was the subject of his economics class.
Throughout the conflict, Ms. Cochran has stuck to what advisers
say is one of the best defenses: a clearly defined and
well-articulated strategy. She keeps talk of Mr. Biglari to a
minimum in meetings with executives, one of whom has a Google Alert
for the activist to keep tabs on what he does outside Cracker
Barrel. "I work very hard to keep it from distracting the
management team," she says.
Meanwhile, some of Mr. Biglari's actions alienated executives
and board members. He uses sharp language and often hangs up on
them, according to people familiar with the calls. And his holding
company recently bought the publisher of racy men's magazine Maxim,
raising eyebrows at Cracker Barrel, which doesn't serve alcohol and
strives to project a folksy, family-friendly image.
Mr. Biglari declined repeated requests for an interview. He has
said he believes as a holder of 20% he has a right to a board seat
and that the company's brand should earn even better returns than
it has.
The company's improving stock price has strengthened Ms.
Cochran's hand. Since she took over as CEO, Cracker Barrel's total
return is about 260% including dividends, nearly triple the S&P
500's 92%. Mr. Biglari's stake, which he has said cost him about
$241 million to build, is now worth $589 million.
This spring, Mr. Biglari called a special meeting to try to
force a sale and suggested he would like to buy Cracker
Barrel--after saying for years he wasn't interested in doing so.
Investors, already well-versed in the arguments, told Ms. Cochran
and Mr. Hyatt there was no need to meet with them in person to make
their case.
Glass Lewis, which hadn't backed Mr. Biglari since his first
push for board seats, delivered particularly harsh words this time.
"Biglari asserts in its primary proxy filing that the incumbent
board is 'out of touch with reality,' a sweeping and perplexing
conclusion we find grates coarsely against the sobering realities
of Biglari's own success," the proxy adviser wrote.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
At the special meeting, in April, 93% of shares that voted,
excluding Mr. Biglari's, rejected his motions.
Tuesday, Cracker Barrel stock hit an all-time high as it topped
expectations for the fiscal first quarter and raised its guidance
for the year.
Still, despite Ms. Cochran's successes, she can't breathe
easily: Mr. Biglari still owns one-fifth of the company.
At Hain, the target of Mr. Icahn, Mr. Simon took a different
tack. He says he got "scared" as he studied other companies that
faced the activist. "I didn't want my employees coming to work
every day worried the company was going to be broken up or sold,"
says Mr. Simon, the company's founder. "I didn't want my customers
worried. 'What's going to happen to Hain?' "
Mr. Simon says he was determined not to make Mr. Icahn the enemy
or distract the company with an acrimonious fight. Rejecting advice
from bankers and lawyers, he decided to attend his first meeting
with Mr. Icahn alone. The two dined at Mr. Icahn's Park Avenue
apartment in New York, where the activist raised concerns about
costs and compensation, but expressed optimism about the
natural-foods business.
Soon after, Mr. Simon granted Mr. Icahn two board seats,
including a position on the committee that determined the CEO's
pay. He says he sought Mr. Icahn's ideas and turned to the
activist's board members for advice on acquisitions. The two had
dinner at least three times a year, either at the New York
apartment or Mr. Icahn's house in the Hamptons on Long Island.
Still, tension remained. Mr. Icahn, known for making late-night
phone calls, would ring Mr. Simon at 11 p.m. and talk for hours
about lowering costs such as insurance rates and audit expenses.
Sometimes, he pressed Mr. Simon to sell the company.
"I'm not doing it. I'm not doing it," Mr. Simon says he would
reply.
Mr. Icahn told Mr. Simon he could be paid well, but to take his
rewards in shares so that he got rich if other shareholders did
too. In 2012, Mr. Simon's contract was up for renewal and the sides
negotiated a new one: Mr. Simon gave up a yearly grant of stock
options and instead received a smaller one-time bunch of restricted
stock that had both performance and time hurdles.
They developed a mutual respect, the men say. But Mr. Simon knew
Mr. Icahn, who continued buying more Hain shares, kept a close eye
on the stock price and that if Hain faltered, the dynamic could
change.
Instead, Hain's revenue grew, natural and organic foods became
more popular and the stock market surged. The company sported a
$140 million profit for its fiscal year ended in June, nearly five
times the figure in 2010. Costs were 14.5% of total revenue, down
from 18.8% the year before Mr. Icahn arrived.
In October last year, the two toasted each other at a dinner
after Mr. Icahn sold his shares, which had risen nearly fourfold
since 2010, likely yielding the activist more than $400 million in
profits, according to filings.
Mr. Icahn praises Mr. Simon's savvy read on consumers and skill
at spotting good acquisition targets. "I think he had a passion,"
Mr. Icahn says, adding that the CEO's willingness to work with him
constructively helped.
For Mr. Simon, their relationship changed his thinking. He
recalled a customer who once asked him if he would rather face a
fate akin to being struck by lightning, or face Carl Icahn.
Initially, he might not have chosen Mr. Icahn, he says. But "as a
CEO, I learned a hell of a lot."
Write to David Benoit at david.benoit@wsj.com
Access Investor Kit for Valeant Pharmaceuticals International,
Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=CA91911K1021
Access Investor Kit for Allergan, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0184901025
Access Investor Kit for Cracker Barrel Old Country Store,
Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US22410J1060
Access Investor Kit for The Hain Celestial Group, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US4052171000
Access Investor Kit for Sotheby's
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8358981079
Subscribe to WSJ: http://online.wsj.com?mod=djnwires