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The Morning Brief: Activists Grab the Spotlight, Again

Tuesday was hedge fund activist day. At least six high-profile agitators made the news, either announcing new positions, trying to influence developments at existing investments or securing seats on boards of directors. The most high profile announcement came from Daniel Loeb’s Third Point, which said it had taken a stake in Dow Chemical Co. The New York–based hedge fund firm, which said it now counts Dow as its largest position, called on the chemicals giant to spin off its petrochemical business and execute a major share repurchase, among other things.

In response, Dow issued a statement stressing that it is very aware of its shareholders’ positions. “We engage with all of our owners to understand their views and we welcome all constructive input with a common goal of enhancing long-term value,” it added. “We believe our investments have yielded sustainable value for our shareholders and will continue to in the near and long term. We intend to continue an open dialogue to further enhance value for all of our shareholders.”

Starboard Value’s Jeffrey Smith fired off another letter to Clarence Otis, chairman and chief executive officer of Darden Restaurants, reiterating his opposition to the restaurant company’s plan to spin off its Red Lobster chain and calling on the company to delay this plan. Smith, whose New York–based hedge fund firm Starboard owns 5.5 percent of the stock, emphasizes the company should “more fully evaluate all available operational, financial, and strategic alternatives” for Darden in order to execute a more comprehensive plan to boost shareholder value.

“This evaluation should include consultation with the company’s financial advisors and discussions with shareholders such as Starboard,” Smith adds. He says the company should take more time to evaluate all available opportunities. “We believe a separation of Red Lobster as currently conceived could destroy substantial value,” Smith adds. He feels the new, stand-alone company’s stock would trade poorly, may impair Darden’s ability to realize full value for its substantial real estate holdings and fails to address the main factors behind Darden’s continued lackluster results. He cites the company’s bloated cost structure, a lack of focus on restaurant operations and an inefficient asset base and capital structure.

Also on Tuesday, Starboard disclosed that it reduced its stake in Calgon Carbon to 8.5 percent from 9.7 percent in early November. That’s when Starboard sent a 53-page letter and analysis to Randall Dearth, president and CEO of Calgon Carbon, offering ways to boost the stock price of the company, which makes and sells products involved in the purification, separation and concentration of liquids and gases. In March 2013, Starboard and Calgon worked out an agreement whereby the company agreed to add two independent directors and amend its shareholder rights agreement.

In a separate filing, Starboard on Tuesday also disclosed that it reduced its stake in Integrated Device Technology to 6.8 percent from 8.4 percent on October 31, when the hedge fund entered into a sales trading agreement. Back in June 2012, the semiconductor-products manufacturer named two of Starboard's candidates to its board. Since then the stock has nearly doubled.

New York–based hedge fund firm Elliott Management raised its stake in German drug distributor Celesio to the equivalent of 24.08 percent of voting rights, according to Reuters, citing regulatory filings to the Frankfurt Stock Exchange. Elliott, headed by Paul Singer, previously controlled shares with less than 20 percent voting rights. Earlier this month McKesson failed to reach the necessary level of tendered stock and convertible bonds to complete its acquisition of Celesio. Elliott had agreed to sell to McKesson its position in Celesio stock and bonds after earlier holding out for a better price.

Meanwhile, Mondelez International announced it has added Nelson Peltz, chief executive officer and a founding partner of New York–based investment firm Trian Fund Management, to its board of directors. This boosts the size of the board to 12 from 11 members. Under the deal, Peltz will be included among the company’s slate of nominees at its 2014 annual meeting. Peltz has agreed not to push for Mondelez to merge with PepsiCo, as he suggested at last July’s Delivering Alpha conference, according to CNBC. Mondelez, formerly Kraft Foods, was renamed after it spun off the North American grocery business, Kraft Foods Group, on October 1, 2012.

Ricky Sandler’s New York–based hedge fund firm Eminence Capital, which owns 4.9 percent of Jos. A. Bank Clothiers, announced it has nominated two individuals from the clothing and retailing industries to become directors at Jos. A. Bank’s annual meeting. The nominees are Bruce Klatsky, former chairman of Phillips-Van Heusen, and Norman Matthews, former president of Federated Department Stores. “We want to reiterate that we intend to support Men’s Wearhouse’s nominees and will withdraw our nominees if those proposed by Men’s Wearhouse are still in the running at the time of the Jos. A. Bank annual meeting,” Sandler said in a press release.

In yet more activist activity, Keith Meister’s New York–based Corvex  Management has hired Patrick Dooley as general counsel. Dooley previously worked at the law firm Akin Gump Strauss Hauer & Feld for 19 years, where he focused on investments and acquisitions by private-equity firms and hedge funds, including activists. Dooley recently advised another activist, Mick McGuire’s Marcato Capital Management, in its activist activities regarding Sotheby’s and assisted Larry Robbins’ Glenview Capital Management when it replaced the board of Health Management Associates, according to a Wall Street Journal report.

Hedge fund assets surged by 17 percent last year, to $2.63 trillion, according to a new report from Chicago–based industry tracker Hedge Fund Research. Most of the gains were due to performance. For example, total capital increased in the fourth quarter alone by $120 billion, but just $10.5 billion came from net inflows. Event-driven funds experienced the largest amount of inflows among all strategies for the first time since 2007, according to the report, thus surpassing relative-value arbitrage as the second largest strategy.

The largest strategy remains equity hedge, which increased by $48 billion in the fourth quarter, including inflows of $8.6 billion, finishing the year with a record $734 billion. Macro funds experienced an outflow of $13.3 billion in the fourth quarter, thanks to outflows from systematic diversified/CTA strategies, which have been experiencing a rough several years now. HFR also said investors moved away from concentrating most of their assets in the largest fund firms. In the fourth quarter, $5 billion went to firms with greater than $5 billion in assets under management, while $5.3 billion was allocated to firms with between $1 and $5 billion. For the entire year, $40 billion went to firms with greater than $5 billion, $16.6 billion to firms with between $1 billion and $5 billion and $7.2 billion to firms with less than $1 billion in assets.

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