By Pete Gallo
At Ramius, this may be remembered as the summer of the proxy war. The event-driven fund manager recently executed two major proxy offensives, one a decisive win; the other a temporary stalemate that could reignite weeks or months from now.
First the win: Filings with the Securities and Exchange Commission show that in early August, Ramius and its wholly owned subsidiary fund, RCG Starboard Advisors, swept a boardroom election, replacing three of Tollgrade Communications’ directors. (Ramius has been a major investor in the Pittsburgh-area telecom-parts supplier since 2005 and owned a 15% stake at the time of the August 4 board elections, regulatory filings show.)
Ramius had a reason to seek changes. The stock, which had traded at a high of $6.96 in August 2008, fell to a low of $3 in October of that year. Subsequently, the stock has recovered and since February 2009 has traded in a tight range, closing on August 10 at $5.70. Ramius and RCG own a combined 2.1 million shares, roughly worth $12 million. (Renaissance Technologies owns about 1 million shares.)
What’s remarkable about the Ramius boardroom win wasn’t the size of the investment at stake, but how it played the game. Ramius made it look easy, but it wasn’t. When the fight began last February, it looked like an uphill battle. Two of Tollgrade’s board members were preemptively replaced just a month before, which made further board changes seem unlikely. What turned the tide, in large part, was an impressive behind-the-scenes attack that made full use of public relations, with Ramius reaching out to fellow investors with clear reasons to overthrow the board.
This culminated in a July 30 letter to fellow Tollgrade shareholders wherein Ramius added its list of grievances to similar conclusions by the independent advisory groups RiskMetrics and Proxy Governance. The grievances cited were concise and devastating—ranging from the fact that current board members hadn’t purchased shares in the prior two years and that they held negligible amounts of the stock. Shares had tumbled 74% since 2003, with the appointment of one director whom Ramius was targeting for replacement. At the same time, directors were collecting $100,000 in annual fees, according to the filing.
In contrast to its own nominees—hands-on telecom pros with employee-compensation experience—Ramius managed to effectively portray the incumbent board as directors with “no relevant telecommunications industry experience.”
Wow. That was a bold assertion considering that this same Tollgrade trio had been in place for five years—at a telecom company. But clearly it worked to swing agitated shareholders.
If Ramius went too far in its offense, Tollgrade’s proxy platform defense attempted so little as to seem pitiful in retrospect.
Most notably, in its shareholder letter filed with the SEC, the company pointed out but a single occasion where Tollgrade’s platform was validated by independent proxy advisory groups; the company in fact claimed that removing a particular board member might create a Sarbanes-Oxley compliance gap.
Meanwhile, last month Ramius seemingly lost a proxy battle with CPI, a company that provides photographic services in Wal-Mart stores; Ramius owns a 26% stake with 1.7 million shares. I say ‘seemingly’ lost because although Ramius’ picks were not selected over the existing board, there was one inexplicable detail. Allegedly 7.3 million ballots were sent out when there are apparently only 7 million outstanding shareholders. Who said that bean counting in proxy fights is dull?
On July 23, the preliminary results were certified independently, which suggests the Ramius defeat might stick as there is nothing in SEC filings to indicate a formal challenge. Allegations of ballot miscounts are not uncommon—although too many ballots may well be something new.
Even after its proxy setback, Ramius may not complain too loudly. The stock has done well, trading in early August at roughly $19, up from a November low of $1.09.
Also interesting, while Ramius was running a clear public relations offense with Tollgrade, the CPI fight seemed defensive at times. At one point, filings show that Ramius issued a shareholder letter claiming the company was making false statements by alleging the hedge fund wanted to put CPI on the block. Call it Monday morning quarterbacking, but Ramius seems better on the offense than on defense in its proxy plays.
