By Chris Gillick
The majority of hedge funds performed strongly in 2009, but not all of their most prominent equity trades have been winners. A number of activist stakes taken before the meltdown of 2008 are still bleeding, while activist funds in general have retreated from the limelight.
During most of the past decade, activist investors could depend on private equity firms and strategic buyers fueled with cheap credit to help them cash out. But with that endgame mostly shut off, the strategy has scaled down. According to FactSet SharkWatch, which tracks shareholder activism, hedge funds launched only 124 activist campaigns in 2009, half the amount undertaken in 2008. “Not only do hedge funds have fewer assets under management to put to work, but also they must tread carefully given the current economic and political environments,” says John Laide, product manager for FactSet SharkWatch.
Perhaps the bet gone most awry in absolute dollar terms is Carl Icahn’s stake in mobile-device maker Motorola. At the end of 2009, Icahn Partners’ position in the Schaumburg, Ill., company was valued at $929 million, according to filings with the Securities and Exchange Commission. That’s less than half of the roughly $2 billion the veteran activist paid for his 5% stake. Icahn sold more than 24 million shares in the fourth quarter of 2008 for proceeds of roughly $100 million for tax-loss purposes, according to published reports, leaving a running lifetime loss of roughly 50%.
Icahn has not filed an amendment to his original 13D filing with the SEC since May 2008, when he disclosed that he and affiliates controlled 172,176,804 shares (137,741,443 through Icahn Capital), at a total cost of more than $2.3 billion, or $13.69 per share. Motorola’s stock would have to get to about $16 for Icahn to break even on the original purchase, assuming he buys no more shares. As of press time, it traded at about $6.85.
Icahn is proud of the forward movement at Motorola, despite the losses. He has long called for a split-up of the company. “As an activist investor, we are very pleased with the progress that has been made,” says Icahn. “As you know, we have been very strong advocates of seeing a separation take place, which we believe will create more value for shareholders,” referring to recent reports that Motorola is continuing an auction for its wireless-networking business, while planning a spin-off of its mobile-device business combined with its set-top box business into a new publicly traded company.
While not quite as bad, Harbinger Capital Partners’ stake in the New York Times Company has also been something of a dog. The fund began building its position in January 2008, buying 14,250,000 shares, good for just less than 10% of the class-A shares outstanding, according to an SEC filing. By November of that year, Harbinger had doubled its stake to 20%, bringing its total investment to $500 million. In 2009—the same year its flagship fund rebounded with a 46.5% gain—Harbinger pared its stake in the Times below its original cost basis of $17.50 per share, selling more than 10 million shares in three separate transactions—for proceeds of $85.9 million—and reducing its ownership of the company to 12.8%. With the Times stock closing the year at $12.36 per share, the fund’s stake was worth $227 million, translating into a 37% lifetime floating loss on the position. Assuming Harbinger does not buy any new shares, the stock would have to rise to about $22.50 for the trade to break even. At press time, the stock traded at $11, and a board member allied with Harbinger said he would step down in April.
Like Icahn and Harbinger, JANA Partners got caught in the financial storm of 2008. In March of that year, JANA took a passive stake of 5.1% in Convergys, a business-service provider in Cincinnati. But concern over future earnings announced in July 2008 pummeled the stock and caused the fund to convert from a passive investor to an activist one. Convergys ended up being the firm’s largest U.S. long position at the end of the year. By February 2009, JANA owned 14% of the company and founder Barry Rosenstein and JANA nominee Jeff Fox, the former chief operating officer of Alltel, were on the board of directors. At that point, the fund had invested $240 million at a cost basis of $14 per share.
JANA’s main fund gained 24% in 2009 but sold more than half its Convergys shares at below its original cost basis. The fund realized sales proceeds of $82 million last year and held $87 million worth at year-end. At that time, JANA’s lifetime floating loss on the position was 30%, even though Convergys stock had jumped about 50% since JANA got board seats. In February, Convergys named Fox CEO. Given that JANA already realized losses in Convergys as part of its 2009 returns, the fund views its breakeven internally at about $13 per share, according to an investor. At press time the stock traded at $12.50.
While Icahn’s, Harbinger’s and JANA’s stakes at least benefited somewhat from the market rebound of 2009, Shamrock Capital Advisors’ foray into Jackson Hewitt Tax Service never got a lift from the rising tide.
Shamrock, a California family office that manages part of the Disney fortune and specializes in activism, got involved in Jackson Hewitt, of Parsippany, N.J., just as the credit crisis was unfolding in the fall of 2007. Shamrock bought 6.6% of the tax preparer at an average price of $30 per share then, calling the shares undervalued because of what it termed “governance deficiencies.”
Shamrock’s stake would increase to more than 10% of the company by the spring of 2008, costing it $87 million. But a poor earnings report around the same time led Shamrock’s stake to shrink to $37.5 million by year-end, and its ownership stake was reduced to 8.3%. Shamrock was forced to sell shares following a redemption by a major shareholder of the Shamrock Activist Value Fund, which housed the investment. The stock traded at $15.69 at the end of 2008, down from $30.14 a year earlier, both adjusted for dividends.
Not even hope could lift Jackson Hewitt in 2009. It closed the year at $4.40, hurt by questions about its funding. After further sales and redemptions, Shamrock now owns just 5% of the company, and its stake was valued at $6.3 million at the end of last year for a lifetime floating loss of about 80%. As of press time, the stock traded at $2.70, and a new activist investor, Discovery Group Holding Company, has stepped in. The shares would have to hit $53 for the fund to break even on its original cost. Shamrock did not return calls for comment.
