Mick McGuire’s Marcato Capital Management has lost its battle for board seats at Deckers Outdoor Corp., the UGGs boot maker, in a contentious battle that did not move the hedge fund’s way even after it bowed to the wishes of influential proxy advisor Institutional Shareholders Service and changed its slate of nominees.
The Deckers battle is the third high-profile proxy battle in recent months where the ISS recommendation played a starring role. Nelson Peltz’s Trian Management narrowly won its hard-fought battle for a single board seat at P&G after winning the ISS endorsement, while Bill Ackman’s Pershing Square Capital Management lost the proxy vote at ADP after ISS endorsed management’s slate. In that case, ISS made the unusual recommendation that shareholders vote for ADP’s slate, but withhold one vote so Ackman might have a shot at one board seat.
ISS originally took a similar tack with McGuire as it had with Ackman. It endorsed Deckers’ slate of board nominees, but it left open the notion that the hedge fund might deserve three board seats — instead of the nine it had proposed.
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In its initial recommendation for Deckers’ nine-member slate, ISS had acknowledged that the company’s “prolonged underperformance” meant that “some degree of board change is necessary.” But it said Marcato’s slate “could not meet the requirements of ISS’ framework...involving a possible change of boardroom control.”
ISS said only four of the San Francisco-based hedge fund firm’s nominees had significant boardroom experience and that the firm had not outlined a business plan. Almost immediately, Marcato withdrew most of its nominees, keeping only three.
Just two days later ISS — in a surprise switch — changed its recommendation to endorse the Marcato slate instead of that of Deckers.
“The board’s apparent lack of urgency in addressing the company’s pronounced, long-term underperformance and the valid governance concerns raised by the dissident are large contributors to the assessment that direct dissident support is now warranted,” ISS said on December 7.
But the abrupt change of heart appears to have come too little, too late to swing the vote in Marcato’s favor, according to the preliminary results.
“We are very pleased with the outcome of today’s vote,” the Galateo, California-based Deckers said in a statement announcing that its nine director nominees appeared to have won. “Today’s outcome reaffirms that we are on the right track.”
The stock immediately fell 4 percent on the news, to about $75, in midday trading on Thursday.
McGuire, in a statement following the vote, said, “We continue to believe that the status quo at Deckers is unacceptable and the Board must take meaningful steps to avoid repeating its many historical failures. We are pleased to have served as a positive change agent and believe our involvement has created significant value for all stockholders. However, a lot of work is still required in order for Deckers to reach its full potential.”
Earlier, Deckers had refused to settle with Marcato, the hedge fund firm said in a securities filing. The same day of the filing, Deckers made a renewed plea to shareholders, saying among other criticisms of Marcato that the activist “insists on recklessly and rapidly closing our stores, even profitable ones.”
Marcato first took a stake in Deckers in February. It has since become an 8.5 percent stake, for which the firm paid an average of about $57 per share. As the stock continued to slide this year, in October Marcato sued the company for postponing its shareholder election until December, among other reasons. At that time, Marcato put up a slate of ten board nominees, hoping to take over the entire board.
Even though that move didn’t pan out, the stock is still up some 38 percent, closing at $78.35 on Wednesday, though it had fallen more than five percent in late trading on Thursday. It’s been a better play for Marcato than another high-profile activist stake of his, Buffalo Wild Wings, which only became a profitable bet after the fast food chain entered a merger agreement with Roark Capital and Arby’s. That stock is up 9 percent for Marcato.
Meanwhile, Marcato is having a bang-up year. Its main fund was up 16.09 percent through November 15, Marcato Encore, had gained 20.02 percent during the same time period, according to an HSBC document that tracks hedge fund performance. The flagship fund is up around 24 percent through November, according to an individual familiar with the numbers.