Starboard Steps Up Its Attack on Small Caps

An activist hedge fund known for flying under the radar has aggressively stepped up its activity in the past two weeks. Starboard Value filed two freshly minted 13Ds with regulators launched a proxy fight with one company, and lifted its stake in three others.


An activist hedge fund known for flying under the radar has aggressively stepped up its activity in the past two weeks.

Starboard Value filed two freshly minted 13Ds with regulators , launched a proxy fight with one on company and lifted its stake in three others.

Never heard of Starboard? Perhaps this may help: It’s the value and opportunity business of Ramius, the alternative-investment management firm that merged with Cowen Group in June 2009. Ramius still owns a minority, passive stake inof Starboard, which is led by Jeffrey Smith, chief executive officer and chief investment officer; Mark Mitchell, portfolio manager and head of risk management and trading; and Peter Feld, portfolio manager and head of research. Starboard manages between $250 million and $700 million.

The fund, which plans to cap its size at $1 billion, does not typically target familiar names, preferring smaller companies with market caps of between $100 million and $1 billion. That’s because, with just two or three business lines, they are easier to understand, they are undercovered by Wall Street, and the companies tend to be focused on growth and generally have good core businesses. Starboard focuses on small caps whose core businesses are growing but are unsuccessfully spending a lot of their cash flow on new growth businesses.

Since 2004, Starboard has nominated directors for about 30 companies. In nearly 90 percent of the cases in which it has filed a 13D and nominated a director — except when the company sells itself during the process — it has wound up putting one of its nominees on the board or reached a settlement with the company.

“We are prepared to go to a proxy fight on every company in our portfolio,” warns Smith. “We don’t bluff.”

At the end of June, the firm had $211 million invested in 15 companies, according to a regulatory filing.

On August 25 it fired off a letter to the CEO of Michael Baker Corp., which provides professional engineering and consulting services, urging the company to stop spending money on acquisitions and instead focus on boosting margins. “We believe Baker is significantly undervalued and there are meaningful opportunities to greatly improve both operating and stock price performance,” Smith said in the letter, lamenting that management had not met with him despite numerous requests. He said there are two primary drivers behind Baker’s stock price underperformance: its acquisition strategy and what Smith deems its “significant underperformance relative to competitors in terms of its utilization rate and other operating metrics.”

He also pointed out that over the past few years, Baker’s stock price has declined more than those of its peers and trades at a significant discount to its peers “on almost any metric.”

In another recent activist action, on August 24, Starboard announced in a regulatory filing that it planned to vote against Zoran Corp.’s proposed merger with CSR. The hedge fund owns 8.3 percent of Zoran, a specialty chip maker.

On August 22, Starboard filed an initial 13D with MIPS Technologies announcing that it owned 8.9 percent of the computer processor manufacturer maker of computer processors. The hedge fund said in its filing that the shares were undervalued but it had no present plan or proposal to unlock this value.

Also on August 22, Starboard sent a letter to the CEO of wireless chip-set maker DSP Group, stressing that the company’s shares are “deeply undervalued” and that significant opportunities exist to improve shareholder value, including hiring a reputable investment bank to explore strategic alternatives. “The core issue facing DSP is excessive spending in pursuit of non-core growth initiatives that have failed to produce expected revenue growth and, in turn, have severely impacted the profitability of DSP,” Smith wrote in the letter, noting that Starboard and related funds controlled by Starboard, own 9.1 percent of the stock, making it one of the company’s largest shareholders. “We believe shareholders have grown increasingly frustrated given the deteriorating financial results and poor short, medium, and long-term stock price performance.”

On August 17, Starboard disclosed that it had upped its stake in software maker Extreme Networks to 9.9 percent and said it was evaluating whether to seek board representation and engage in communications with management and the board. It also urged the company to take immediate steps to maximize shareholder value.

On the previous day, Starboard announced it was launching a proxy fight against Regis Corp., which runs a chain of hair salons, and would seek three seats on the board of directors. Among the nominees: Smith himself. “Regis should dramatically reduce operating expenses, exit its non-core businesses, and focus on its core North American salon business,” Smith said in a letter to shareholders. “We believe that Regis is deeply undervalued and that opportunities exist to greatly improve both operating and stock price performance based on actions within the control of management and the Board of Directors.”

Last, on July 28, Starboard filed an initial 13D announcing that it owned 6.3 percent of Wausau Paper, making it one of the company’s largest stockholders. Noting that it had previously met with several members of the company, Starboard asserted that Wausau is also “deeply undervalued” and that, like Regis, the management and board of directors could act to improve shareholder value.

Starboard noted that the company’s tissue business is very strong and has good prospects but is offset by “dismal performance” in the company’s paper business. “In fact, we believe that the primary reason for the Company’s depressed valuation stems from the continued lack of profitability and low returns on capital of the Paper business,” Smith added in the letter, saying he is also concerned about capital allocation decisions surrounding the planned expansion of Wausau’s tissue business.

Says Smith: “Small caps spend a lot of time growing their top line. We want them to focus on the bottom line.”