The Morning Brief: Starboard Value Puts Pressure on Depomed
This is already a busy week for New York activist hedge fund firm Starboard Value. On Monday it announced it set November 15 for a special meeting of shareholders of Depomed, a pharmaceutical company that specializes in neurology-related products. In a regulatory filing on Tuesday, Starboard stressed its belief that Depomed needs to replace its entire board of directors, citing a number of shareholder-unfriendly actions taken by the current board.
In a letter to shareholders, Starboard, which owns 9.8 percent of Depomed’s shares, also said certain provisions under California law and the company’s bylaws make it “extremely difficult, if not virtually impossible,” to remove any fewer than all of the directors. So Starboard wants to expand the board by three members, to a total of 11, so it can add back up to three incumbent directors. Among its nominees are Smith and Starboard partner Gavin Molinelli.
In the letter, Starboard also said Depomed would be “extremely attractive” to numerous potential acquirers. Starboard initially disclosed an activist position in the stock back in April, stating in its filing that it had “significant concerns” about the company’s corporate governance deficiencies, questionable capital allocation decisions and “egregious actions taken” to avoid being acquired, accusing management and the board of deliberately entrenching themselves. Starboard also threatened to submit its own slate of director nominees at Depomed’s next annual meeting.
In a separate filing late Tuesday, Starboard said it cut its stake in Infoblox to 2.8 million shares, or 4.98 percent of the network management services provider’s total overall. As a result, Starboard no longer is required to report future sales unless its stake goes back above 5 percent. On Monday, Infoblox said it agreed to be acquired by the private equity firm Vista Equity Partners for $1.6 billion, $26.50 per share in cash, which represented a 33 percent premium to Infoblox’s average closing share price over the last 60 trading days.
Interestingly, Starboard sold a lot of shares around the beginning of September, before the Vista deal was announced. Infoblox was a big hedge fund favorite at the end of the second quarter. In addition to Starboard, which was the third largest investor, New York-based Hound Partners was the company’s largest investor. Other top-ten holders included Redwood City, California–based Dorsal Capital Management and London-based Marshall Wace.
Shares of hedge fund favorite Apple were flat on Tuesday, even though UBS raised its price target on the stock from $115 to $127. The investment bank points out in a note to clients that research suggests there is less interest in the new iPhone 7 than for the iPhone 6, but more than there was for the 6s. It also points to other positive developments for Apple, including the recall of Samsung’s Note 7. However, it cautions clients to not get carried away.
“Verizon said it isn’t seeing unusual demand, and we don’t know what is happening in China, where there have not been aggressive promotions,” UBS states in the note. It also increased its upgrade estimate.
At the end of the second quarter, Apple was the fourth most popular stock among hedge funds, with 139 firms holding a position in the shares. It was the largest U.S. long equity holding of Boston-based Adage Capital Management and New York-based Greenlight Capital and the second-largest holding of New York-based AQR Capital Management.
Equity long-short managers boosted their net exposure to 23.6 percent, which is close to their peak, according to a report from Credit Suisse’s prime services group, dated September 20. It also reported that macro/CTA managers cut their developed market equity net exposure to 26 percent. This is similar to what they did ahead of the December Federal Reserve rate hike.
“Macro and CTA managers targeted U.S. markets, in a combination of increased short exposure to and long selling of broad market indices,” the report elaborates. This move cut their U.S. equity net exposure to minus 14 percent, from a positive 11 percent net exposure on September 8. Elsewhere in the report, Credit Suisse points out that commodity funds cut their exposure to copper to a net short stance, from a 43 percent net long exposure in August.