Activist hedge fund Starboard pounces on US companies in turmoil

Boston

MOST activist shareholders have refrained from challenging the boards of US companies during this season of annual shareholder meetings, as businesses reel from the economic fallout of the coronavirus outbreak.

Not Starboard Value.

The New York-based hedge fund, which Jeffrey Smith spun out of investment firm Ramius in 2011, is pursuing proxy contests against five US companies, even as rivals remain largely silent, according to a review of regulatory filings.

Starboard, which built its reputation as a powerful player by winning more board seats than any other activist, is betting companies will be willing to settle during the crisis, so they can concentrate on their business and the safety of their employees.

Last week, it nominated six candidates at data-management software provider Commvault Systems, adding another fight to a lineup that already includes e-commerce company eBay, construction and building materials supplier GCP Applied Technologies, healthcare services company Mednax and medical devices manufacturer Merit Medical. Starboard is looking for roughly two dozen board seats in total, said the filings.

All these companies saw their shares slide at the onset of the pandemic, and are bracing themselves for a hit in their business as a result of the economic downturn.

"What Starboard is doing stands in stark contrast with other activist investors, who are holding back and have reached settlements," said Jill Fisch, a University of Pennsylvania Law School professor and corporate governance expert. "We have never seen a shareholder nominate directors at so many companies at the same time. Starboard is blazing a path for more aggression."

Last year, Starboard won 20 board seats in seven companies, and since 2013, it has won 118 seats, going by data from Activist Insight. It secured the vast majority of them through settlements with companies keen to resolve the board challenges prior to a shareholder vote. It is a track record the roughly US$5 billion hedge fund boasts about when it courts investors, said some of them who discussed the pitch on condition of anonymity.

The firm made history in 2014 when shareholders voted to throw out all 12 directors at Darden Restaurants and install Starboard's slate, a rare feat for a hedge fund at a major US company.

"Their thesis is they don't mind people being afraid of them," said Mark Gerstein, a partner at law firm Latham & Watkins, who advises companies on their defence against activist hedge funds such as Starboard.

The performance of Starboard's targets is mixed. Total shareholder return (TSR) at Darden surged 227 per cent between Starboard joining the Olive Garden restaurant owner's board in 2014 and February 2020, when the coronavirus crisis started weighing on the US stock market. Semiconductor maker Marvell Technology Group's TSR jumped 166 per cent in the period between Starboard joining the board in 2016 and the end of February 2020.

But there were losers, too. In two situations where Starboard appointees comprised at least half of a company's board, online data-tracking service Comscore and drug-maker Depomed - which renamed itself Assertio Therapeutics in 2018 - TSR tumbled 87 per cent and 94 per cent, respectively, in the period between Starboard directors joining the boards and the end of February.

It is not yet clear how the crisis will affect the corporate world's defences against Starboard. Board members are aware of how high the stakes are this year and are tallying the potential cost of losing experienced directors, bankers, lawyers and investors said.

GCP has called the nomination a "self-serving proxy fight that is out of touch with the realities of the current operating environment and global crisis". REUTERS