Many of the largest activist hedge funds have been posting mixed results this year, with most of the best performers generating low-single-digit returns at best. Jeffrey Smith, Starboard Value (Bloomberg)
However, one of the busiest and highest-profile activists for the past few years is also among the most successful. Jeffrey Smith’s New York–based Starboard Value is up about 10 percent through the end of the third quarter.
Smith and Mark Mitchell launched the strategy in 2002. Starboard quickly rose to prominence after being spun off from New York investment bank Cowen Group in 2011; at the end of last year, the firm was managing $4.6 billion.
Driving Starboard’s recent gains are at least two of its newest activist targets, established this year, plus a few older positions. For example, Yahoo, the firm’s largest holding, was up 30 percent for the year through the end of the third quarter; on November 11 its stock closed at $40.42.
One reason is the Internet pioneer’s agreement in July to merge with Verizon Communications for $4.8 billion. But in recent days Yahoo has been bracing its shareholders for the chance that the deal may not go through, at least under the original price tag, thanks to the hacking scandal plaguing the company. Starboard began buying Yahoo stock more than two years ago.
The Brink’s Co., which the hedge fund started investing in back in early 2015, gained 28 percent in the first three quarters of 2016 and closed at $42.10 last Friday. At the beginning of the year, the security company announced an agreement with Starboard that saw it name three new directors to its nine-member board, including Peter Feld, Starboard’s research director. In addition, Brink’s chairman, president, and CEO Thomas Schievelbein announced his retirement.
Starboard’s other big winners this year are new activist positions. Take Marvell Technology Group, whose stock surged about 50 percent year to date through September before reaching $12.98 on November 11. In the first quarter Starboard took an initial position of 20.3 million shares, or 6.7 percent of the semiconductor maker’s total. At the time, Starboard said the stock was undervalued and retained three technology experts as senior advisers.
Sure enough, in late April, Marvell, whose stock is Starboard’s fifth-largest individual long equity position, announced a settlement that would see it appoint Feld and two other people recommended by Starboard to its seven-member board. Starboard has the right to recommend an additional independent director.
Depomed, another new activist target in 2016, also has played a big part in Starboard’s performance. Starboard disclosed owning 9.9 percent of the pharmaceutical maker’s stock in early April. After the firm initiated its position on February 17, shares of Depomed, which specializes in products that treat pain and other central nervous system afflictions, surged 51 percent through the end of the third quarter. On November 11 the stock closed at $20.84.
Along the way, Starboard threatened to submit its own slate of director nominees at Depomed’s annual meeting. It also set November 15 for a special meeting of Depomed shareholders, stressing that the company needed to replace its entire board of directors, and publicly asserted that the company would be “extremely attractive” to many potential buyers.
Less than a month ago, Starboard and Depomed announced that the latter had agreed to appoint three Starboard nominees to its board, increasing the number of directors from six to nine.
Then there’s Insperity, an older and a newer activist target for Starboard. The firm’s eighth-largest individual U.S. long position at the end of the second quarter rose 50 percent in the first nine months of the year; as of last Friday it was trading at $72.35. Starboard first took a stake in the human resources services company in the fourth quarter of 2014.
In March 2015, Insperity agreed to appoint two nominees from Starboard, including Feld, to replace incumbent board members and pledged to add a third director nominated by Starboard and agreed on by the company. The board also agreed to create an independent advisory committee to make recommendations to it on capital allocation, expenses, and targeted ranges for cash flow margins.
Then, on March 12, 2016, Starboard was back, nominating two other people to Insperity’s board to be considered at its upcoming annual meeting. Once again the activist threatened to launch a proxy fight. This was unusual: It’s rare for an investor that has already obtained board representation to seek more directors so soon.
In a March regulatory filing, Starboard acknowledged that Insperity had made progress over the past year but lamented that the stock was still undervalued and said there was still more the company could do to improve its operations and corporate governance.
In late May, Insperity and Starboard reached another compromise agreement whereby John Morphy, a director nominated by the activist hedge fund firm, would be appointed to the board. Insperity’s board said it would launch a search for an additional independent director. The deal also called for the board to make changes to the composition of its standing committees.
Little wonder Starboard is among the most respected activists.
