| Blue Harbour Group CEO Cliff Robbins |
Cliff Robbins, the CEO of Blue Harbour Group in Greenwich, Connecticut, had a quiet victory this week. Robbins is an activist investor, but he calls himself a friendly activist, and one of his target companies, Nabors Industries, came out with a shareholder-friendly plan to reform its corporate governance structure. The California Tea State Teachers’ Retirement System was the main force behind the governance changes, but Robbins, whose hedge fund is the lead stockholder in Nabors, saw the move as part of a larger overhaul that he is spearheading.
Robbins doesn’t conduct his campaigns with fights or proxy contests. Instead he seeks out undervalued companies, mostly in the small to mid-cap range, where he likes the management and directors and finds them receptive to his ideas about how to make improvements that are likely to boost the stock price. He invests only when he’s sure the company’s executives will work collaboratively with him. Nabors, an oil and gas drilling technology and equipment company based in Hamilton, Bermuda, with a market cap of $7.14 billion, was a typical venture for Robbins.
He started looking at Nabors early last year, when the stock was trading at around $15. “We believed the stock was trading at big discount to its intrinsic value,” says Robbins. He spent many hours in meetings with chairman and CEO Anthony Patrello. Robbins recommended selling off non-core assets that the market didn’t value highly. He also insisted that the company change its policy of tying executive compensation to its invested capital; at the time the board determined compensation as a function of earnings before interest, taxes, depreciation and amortization, or EBITDA. The company has since sold off assets, and the board agreed to make the change in compensation policy last year. The stock has been trading in the $22 to $24 range since March, well up from all of last year, even though severe winter weather put a crimp in earnings in the first quarter of 2014, according to a preliminary announcement from the company. (The first quarter earnings report will be released after the market close on April 22.)
Meanwhile CalSTRS, which is an investor in Blue Harbour as well as in Nabors’ stock, was pushing for various corporate governance reforms. “This was totally driven by CalSTRS, which is a thought leader in the corporate governance arena,” says Robbins of the reform. “But as a lead stockholder in Nabors with a good relationship with its senior management and board, we were able to play an important role in facilitating the discussions.”
According to the announcement that Nabors issued Monday, the company has agreed to split the roles of chairman and CEO, although that will happen only after Petrello’s tenure ends. Nabors will also adopt a policy limiting severance payments to 2.99 times an executive’s salary and bonus, formalizing an initiative already implemented in the employment agreements of the CEO and CFO, and has instituted a proxy access policy that allows eligible shareholders to include director nominees in the company’s proxy materials rather than having to circulate their own list of candidates. To qualify as eligible, a shareholder has to have owned at least five percent of the company’s shares for at least three consecutive years, but the company has also announced it will consider lowering the ownership threshold in three years.
Robbins started Blue Harbour in 2004 after a 20-year career in private equity; he had been a general partner at General Atlantic Partners and before that at KKR, where he worked on many of the firm’s leveraged buyout deals and served on the board of RJR Nabisco. He runs his $2.4 billion hedge fund somewhat like a private equity firm except that he invests in publicly traded companies. Blue Harbour’s flagship Strategic Value Partners fund was up 6.4 percent year-to-date through March 31 and 25 percent for 2013, according to people familiar with the fund.
His recommendations to Nabors will continue in meetings behind closed doors, but Robbins says he is pleased to see that the company is conducting a strategic review. According to analyst reports, a strategic change could include splitting parts of the company into different pieces, or some restructuring. Don Bilson, an analyst who heads the event-driven research team at Gordon Haskett Research Advisors in New York, said in a research report issued Monday that the governance measures, the culmination of an effort that has been underway since 2011, were less important than the statement Robbins made about them.
“Having passed this milestone, Nabors’ management now can redouble their efforts to advance the company’s strategic objectives, which already have begun to deliver significant value to shareholders,” Robbins was quoted as saying in a press release from Nabors.
“This is interesting because NBR conducted a strategic review last summer and the conclusions of that review have never been shared with investors,” Bilson wrote. “We have thought the company’s portfolio could be further trimmed and with these latest governance changes now locked in, it leads us to believe some news on the strategy front may not be far off.”
Blue Harbour now has activist positions in nine companies. In addition to Nabors, those holdings are Akamai Technologies, Allscripts, CACI International, Chico’s, Globe Specialty Metals, Progressive Waste Solutions, the Tribune Company and one the fund has not yet disclosed.
In all of these cases, Robbins is sitting down with the management and offering suggestions. He has never sued a company or run a proxy contest. He served on more than 15 boards during the course of his private equity career, but he prefers not to serve on boards in his present role.
“We feel we can be just as effective in the role of lead stockholder,” says Robbins.
Blue Harbour usually holds its investments for two to three years, while most boards want directors who are prepared to make a commitment of at least five years. “And the policy of not insisting on board representation also goes well with our friendly approach,” says Robbins. “Since we view ourselves as a valued lead stockholder, we don’t need board seats to amplify our influence.”
