THE GADFLIES ARE BACK — and this time they've got deep pockets.
Target Corp., Dillard's Inc., Chico's FAS Inc., Charming Shoppes Inc., Syms Corp. and Haggar Corp. are just some of the fashion firms that have faced, or are confronting, activist shareholder campaigns. These outsider efforts are often marked by lawsuits, battles to sell divisions or replace board members and the airing of as much dirt as can be excavated.
It is all part of the deal when companies tap the public equity markets and open themselves up to being owned by, well, everybody.
And while once such activist shareholders were individuals who would dominate annual meetings with questions ranging from why a particular blouse style was discontinued to the price paid for an acquisition, these days such shareholders are well-funded investment funds that have the wherewithal — and staff — to wage long-term battles. In both cases, the activists see themselves as an important check on management.
"I want them to know we're watching them," said Thomas Kahn, president of the Kahn Brothers equity fund. "As long as they know you're watching, it can be difficult for them to steal. They'll try, but it will be difficult."
Kahn fought his way onto Haggar Corp.'s board in 2003, two years before the firm was sold for $212 million.
The retail sector has seen a flurry of activist activity over the past few months. Just last week, Chico's came under fire from Spotlight Capital Management LLC, which argued that John Burden 3rd, a former Macy's executive, should not be reelected to the board because of a conflict of interest related to a family member who works at the retailer.
In April, Dillard's reached an accord with investors Barington Capital Group and Clinton Group after months of back and forth. The investment groups pushed the retailer to boost profitability and along the way pressured it to disclose information on the firm's executives, including their compensation and perks such as the use of private planes.
Ultimately, Dillard's agreed to elect four new members to its board and said it was committed to using its real estate assets and capital as efficiently as possible.The Dillard's incident shows some of the mechanisms employed by activist shareholders: once they target a firm, management needs to prepare themselves for the possibility of angry letters to shareholders and press releases poking holes in their corporate strategy.
The measure of a shareholder campaign, though, is not how much noise it makes, but what impact it has on the stock.
"Actions speak louder than words," said Scott Krasik, equity analyst at C.L. King & Associates Inc. "In the short term, people can draw their own conclusions, but in the long term you've really got to put up or shut up."
Activism is most successful at boosting shareholder value when the prodding results in the sale of the company, said Robin Greenwood, associate professor of business administration at Harvard Business School.
Last year, Greenwood and Morgan Stanley's Michael Schor, published a paper that examined activist campaigns from 1993 to 2006. They found that in instances where a target company wasn't sold, its stock produced average results.
"Fundamentally they're investors, not managers, and their objective is to make money quickly," he said. "They identify assets that are mispriced. It's much harder to make money on some long-term strategic or operating change."
In the end, that is what makes these investors different from hedge fund and other private equity players like Texas Pacific or Cerberus trawling the retail and fashion worlds looking for acquisitions. These investors are out to buy companies, grow them and then sell them again at a significant profit. Many activist shareholders, on the other hand, tend to be in it for the relative short term — and are looking to force a sale of the target company.
Although managements might firmly disagree as they sweat the pressure, Greenwood contended that, "Activism has been terrific for shareholders. You like nothing better than to hear that some company you own has just been targeted by Carl Icahn."
In January, at Financo Inc.'s annual dinner, the famed corporate raider said retailers' troubles on Wall Street made them ripe for the picking. "You retail companies are in major stock trouble and that's what I like," said Icahn.Although activist investors often grouse about mismanagement or a moribund business strategy, the common denominator of their campaigns is a stock that is perceived to be unduly cheap.
"A lot of it is driven by the value and the lack of forward movement," said Tom Chin, managing director of consulting and analytics at Telsey Advisory Group. "In some instances, companies do react to the activists by changing their business strategy or accelerating their strategy."
That appears to have been the case with Target investor William Ackman, who bought into the firm in a big way, scooping up a 9.6 percent stake last summer.
In a July 2007 filing with the Securities and Exchange Commission, Ackman's Pershing Square Capital Management said it intended "to discuss with management ways in which this undervaluation can be corrected."
That was widely interpreted to mean Ackman might push the company to sell off its credit card business.
Though it is difficult to pin down cause and effect, Target did sell almost half of its credit card receivables to J.P. Morgan Chase for $3.6 billion last month.
Over the last year, the hedge fund has bought and sold shares of the firm and at the end of March owned 3.1 percent of Target's stock — valued at more than $1.25 billion as of last week.
On a more modest scale, Syms, a 33-store off-price chain based in Secaucus, N.J., has also attracted the attention of activists who think the company's stock is undervalued.
Esopus Creek Value, an investment firm that owns nearly 4 percent of Syms, said last week that its research suggests the retailer is understating its owned real estate assets by 33 percent. The investment firm said it would not vote for members of Syms' board who are up for reelection or to ratify the reappointment of its independent accountant. Together Sy Syms, chairman, and his daughter Marcy Syms, chief executive officer, own 57 percent of the company. In December, Syms decided to delist its shares from the New York Stock Exchange. This riled investors, who in turn filed suit, prompting the company to relist its shares, this time on the Nasdaq exchange.It is not uncommon for activists to take their cases to the courts since often their appeals to the public aren't enough to move management.
Although these tools can be slow to change companies and have a limited impact, they are often the best available to shareholders.
Despite a willingness to shake things up, these investors are not simply spoiling for a fight.
"It's a lot of time and effort to be an activist," said Robert Frankfurt, president of Myca Partners Inc., an investment firm that has pushed Charming Shoppes to rejigger operations and boost profitability. "It's not for the faint of heart or the light of pocket."
Charming Shoppes was a target, in part, because of its flailing stock, which fell 60 percent last year. The stock closed up 3.9 percent to $5.39 Friday.
Myca and Crescendo Partners, another investor, formed the Charming Shoppes Full Value Committee and took their case to the press and shareholders.
The retailer fired back, alleging in a federal lawsuit that the investors filed misleading documents with the SEC.
Ultimately, the retailer cut a deal and, among other items, agreed to support the nomination of retail veterans Richard Bennet 3rd and Michael Goldstein to the board.
"We're anxious to move forward," said Gayle Coolick, Charming Shoppes' vice president of investor relations. "We always think fresh perspective is positive."
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