That appears to be the attitude retail and fashion firms are now taking toward a group they once considered their enemies — activist investors. While the two camps haven’t exactly become bosom buddies, many board directors and top management have learned a valuable lesson: It’s better to consider what the activists might be proposing than face a drawn-out, vituperative battle that could end up with them being eaten alive.
In other words — and to use that old phrase — companies are discovering that it’s better to bring the fox into the henhouse.
Activists have been circling plenty of firms in the industry lately, including Macy’s Inc.; Avon Inc.; Christopher & Banks, and The Children’s Place. In most cases, these firms — while not adopting all the activists’ suggestions — have begun taking actions that are close to what the activists have proposed.
John Pound, senior adviser to investment banking firm Peter J. Solomon & Co., who specializes in corporate governance and activist-investing strategies, said it’s the current culture of corporate boards that has helped bring some modicum of success to activist positions.
“Companies are no longer willing to fight so there’s this shift in the cultural balance of power. These campaigns from the activists are no longer about taking control. So as a company [that’s] not hitting every ball out of the ball park, when a large investor says it’s not asking to take over but just want its ideas to be heard in the board room, it’s really hard for boards to stonewall that,” Pound said.
Pound did note that one of the dangers of activism in the apparel and retail space is when the investor focuses on the balance sheet, such as suggesting that a division be spun off. His point is that the focus should be on product, an understanding of the brand and what it means to the consumer.
Not that things have been that easy for the activists lately. The disastrous attempt by William Ackman of Pershing Square Capital to force change at J.C. Penney Co. Inc. pushed the retailer deeply into the red and cost Ackman millions in losses on the stock before he finally retreated. His record since in sectors other than retail has been decidedly checkered.
Ackman’s antics and those of other activists also have put them on the radar of Congress — and at least one presidential candidate — more than ever. There is now legislation in Washington aimed at increasing transparency and strengthening the oversight of activists. That’s because the concern remains that activist hedge funds are only in the game for short-term profits.
Sens. Jeff Merkley (D., Ore.) and Tammy Baldwin (D., Wis.) earlier this month introduced The Brokaw Act, legislation to increase the transparency of activist hedge funds. Cosponsoring the bill are Democratic presidential candidate Bernie Sanders and fellow antiWall Street Senator Elizabeth Warren (D., Mass.).
One of the provisions redefines “person or group” so that a collective stake by several funds working together would be considered a single entity required to disclose any stake above 5 percent. Investors are already required to disclose stakes above the 5 percent threshold.
Baldwin’s Web site said the change prevents “wolf packs from skirting the intent of the disclosure rules” when the individual investments are below the reporting threshold requirement. The bill also hopes to shorten the time frame for 13D disclosures to 2 days from 10 so there’s less chance of a “tipping” to allies of an impending filing, a move that can provide an opportunity for so-called riskless gains by allied hedge funds.
Brokaw is named after a small town in Wisconsin, home to a paper mill that provided jobs for the town and that the senators clearly believe represents a cautionary tale of activist investing. Starboard Value — the activist investor that has a stake in Macy’s and has been agitating for change at the retailer — acquired Wausau Paper Co. in the town and ultimately closed the mill. The town of Brokaw went bankrupt as a result.
Doug Snyder, Starboard’s managing director and investor relations point person, did not return a request for comment about Wausau.
Even if the Brokaw bill advances in the divided Congress in what will be a lame duck session after the November elections, it may not go far enough to address short-term gaming when activists claim they are in it for the long haul.
Andrew L. Sole, managing member of Esopus Creek Advisors, which is the adviser to the hedge fund Esopus Creek Value Series Fund, said, “If legislators wish to properly align a company’s long-term interests with those activists that purportedly represent the long-term interests of stockholders, Congress should pass legislation that mandates that the short-swing rule would apply to any holder that files a 13D and extends the penalty period to 18 months, rather than the current six months. This simple change in the law would likely rid the market of the scores of activists who are simply “renters” of common stocks and their derivatives. Such a Congressional act would protect true long-term investors.”
Short-swing is the profit rule under the Securities and Exchange Commission regulations that requires company insiders to return profits made from the purchase and sale of company stock when both transactions are within a six-month period. A company insider is anyone — officer, director or holder — who has more than 10 percent of the company’s shares.
Even as many companies and their boards still consider activist hedge funds the scourge of the investment community, that isn’t stopping activists from circling firms in the fashion world. Starboard Value, led by Jeffrey Smith, has been advocating that Macy’s Inc. spin off its real estate to lift shareholder value. Starboard has been agitating for change at Macy’s at the same time that it has been pushing for the entire board of Yahoo Inc., another of its investments, to be replaced.
Smith has suggested that Macy’s stock could be worth more than $125 a share, when the company is viewed as two operating components — the operating business and its real estate. Smith even pegged Macy’s enterprise value at $29 billion, with $21 billion made up of the real estate value. In January, Greenlight Capital’s David Einhorn, who has a stake in Macy’s, said the retailer could be taken over by a private equity firm and a real estate investment trust.
Shares of Macy’s have been trading in the range of $44. Macy’s, under the leadership of chairman and chief executive officer Terry J. Lundgren, has nixed Starboard’s push to create a real estate investment trust. The retailer now has a squadron of professionals advising it on strategy, such as the possibility of joint ventures. Last week Macy’s added real estate expert Bill Lenehan, the ceo of Four Corners Property Trust Inc., to its board beginning on April 1.
Some believe that Smith might have even suggested Lenehen as a possible board candidate. Lundgren has said the company is in constant dialogue with its shareholders. The fact that Macy’s is even exploring options for its real estate portfolio reflects the growing influence — and success — that some shareholders are having in getting their voices heard, even if Macy’s has maintained that the review was something they already had on their agenda.
Bebe Stores Inc. is another retailer that has fallen under the activist spell. Prentice Capital Management LP now owns over 5 percent of the outstanding stock. Prentice Capital founder Michael Zimmerman has publicly expressed his frustration with Bebe’s chief executive officer Manny Mashouf and the company’s board of directors in letters filed with the Securities Exchange Commission. The letters express concern over the declining stock price, Mashouf’s compensation package and a belief that the board isn’t entertaining credible strategic candidates.
Zimmerman also believes Bebe should secure a line of credit to strengthen its balance sheet and communicate a turnaround plan to shareholders. So far, Bebe has not responded to Prentice Capital or Mr. Zimmerman’s overtures.
On Monday, Avon Products Inc. and the investor group led by Barington Capital Group reached a settlement to avoid a proxy fight. The agreement gives Barington the right to approve the appointment of an independent director — selected jointly by Avon and Cerberus Capital Management — to Avon’s board.
Avon completed the spinoff of its North American business to private equity firm Cerberus Capital Management earlier this month. Cerberus took over the business as part of a strategic partnership with Avon, one that called for Cerberus to invest $435 million for a 16.6 percent stake in Avon, plus $170 million for an 80 percent ownership in the North American business. Avon retained a 20 percent minority interest in the North American business, now called New Avon.
The Avon-Barington agreement suggests that the parties have been able to build a level of trust on both sides as a filing with the Securities and Exchange Commission, a Form 8-K, indicates the absence of a so-called standstill provision. That means that should the investor group suddenly find that the necessary changes aren’t being made, it still has the option of going public with its concerns.
It wasn’t Barington’s first win.
On March 14, Avon provided additional details on the execution of its three-year transformation plan that was disclosed during its investor day in January. Those details include the reduction of headcount and the move of its headquarters from New York to the U.K. Avon said both moves are to align corporate functions with current and future needs of its business.
Barington was quick to take credit for some of the changes.
Barington’s chairman and chief executive officer James A. Mitarotonda said, “We are pleased that Avon is following our recommendation to reduce costs and corporate overhead. We believe that there is still much more that needs to be done to improve the business as outlined in our Dec. 3 letter.”
That letter, among other points, called for change in the senior management team, including current ceo Sheri McCoy, whose background the investor group considers a poor fit for the beauty firm.
On March 10, Christopher & Banks reached an agreement with its activist investor Macellum Capital Management, which had been pressing for change since March 2015. The agreement included the nomination of four new independent director candidates for election to the company’s board at its annual shareholders meeting on June. 30. One of those candidates includes Jonathan Duskin, Macellum’s ceo.
Macellum also was the activist investor in The Children’s Place, as was Barington. The activists and Children’s Place last year reached an agreement to settle their differences, but not before the investors went hostile with a proxy fight. The settlement was reached just hours before the battle was to take center stage at the retailer’s annual meeting.
Macellum’s Duskin spoke with WWD about the differences in dealing with the two retail boards, noting that the process at Christopher & Banks had the two working more “collaboratively.” There’s no question that the battle at Children’s Place can only be described as acrimonious. Duskin said that was avoided at Christopher & Banks, in part because the directors who resigned “realized the board needed to change.” Duskin also said of LuAnn Via, the retailer’s president and ceo, “Management has been incredibly supportive. LuAnn made some mistakes, and has implemented some changes.”
And last year, Legion Partners Holdings LLC, one of the activists in Perry Ellis International Inc., was successful in agitating for the separation of the chairman and ceo roles. George Feldenkreis, who held both roles last year, remains the company’s chairman. His son Oscar has taken over the ceo role. According to Feldenkreis in an interview last May, the separation of the two roles was something the company had already been contemplating as part of its succession planning.