MorningWord 8/13/13: In my time in this business I have seen some pretty interesting dust-ups between activists and the the companies that they target. Guys like Dan Loeb of Third Point used to amuse market participants with his communications to his target companies (remember YHOO here), but he has tempered his process a bit of late, much to the financial press and onlookers dismay. One thing that has always struck me is what and how these activists choose to go after. Obviously one of the first prerequisites is finding unlocked value that has been overlooked or simply mismanaged by those charged with running the company as was the case for years prior to Loeb entering his YHOO position in 2011 pushing for board representation. Looking at his entry to the stock in 2011, when it was left for dead, the change he affected on the management and board level, his ability to refocus management & investors, and how his action resulted in a positive outcome….. the guy deserved to sell two thirds of his stake BACK to the company for more than 125% gain at multi-year highs. Bravo.
Loeb’s YHOO trade was about as close as you will come to a work of art in this business, which is why when some of these activist situations go terribly wrong, as they have for another high profile investor Bill Ackman of Pershing Square this year they garner so much attention. Ackman has been kicked around a bit for what seems to be a precarious short in HLF, with his thesis largely predicated on hope for some negative FTC action, while another high profile position gone awry is his nearly 18% holding in beleaguered retailer JCP that is approaching death-spiral territory. I am not going to go into the merits of each, make no mistake about it, this guy does his work and he certainly puts his money where his mouth is, but the only problem of late is that his mouth might be writing checks his fund can’t cash.
It strikes me sometimes as odd the stories that activists are willing to fight for, and none more interesting than JCP by Ackman and Carl Icahn’s ongoing (albeit petering off) battle for DELL. When Ackman took his stake in JCP it was a very different company, possibly reflecting the fact that the value of his investment has nearly been cut in half since back in 2010. And to be honest I have to assume the stock looked a lot more attractive when it was in the mid $20s then it does now in the low teens. IN the last 3 months JCP has burned about $1 billion is cash as the company has done an about face on the retail strategy that was an about face on the decades long prior strategy. The company’s market cap has shrunk to $2.9 billion, cash sits at little less than $1 billion while their debt is nearing $4 billion all with the backdrop of ballooning losses and sales declines. The best case scenario in the near term would just be stabilization, and a Loeb style “win” seems to be years off.
Which leads me to BBRY, and why it may be perennially the ugly red headed step child of activist bait. Yesterday the company announced that they had once again hired bankers to “explore strategic alternatives, that could include a sale”. This is a term that should be quite familiar to RIMM shareholders as it seemed that since the prior management lost their grip on the once monopoly of the smartphone market, that takeout might be their only way out. The problem is now that almost every strategic buyer the world over has taken a look at BBRY and passed in the last 2 years, which leaves financial buyers, the sort that would take the company private. Much like JCP, and this is the only real comparison, BBRY earnings and sales have seen a dramatic decline of late, but the company is infinitely better capitalized with 50% of their market cap in cash and no debt. For the better part of 2013, since Michael Dell announced his intention to take the computer company bearing his name private, I have wondered aloud what makes DELL so much more attractive to private equity that BBRY? I suppose the third time will be a charm (third “exploration” in so many years) as media reports have picked up numerous instances where Canadian pension funds would invest in a bid to take BBRY private. I guess sometimes situations have to be so picked over, and so reviled before they have a prayer of happening.
DISCLOSURE: Hopefully No Red Heads were injured in the naming of this post.