Sunday, March 12, 2006

Welcome RealMoney subscribers!

Thanks to all of you and particularly James Altucher for your interest in Value Discipline. James has been kind enough to have referenced my blog on a couple of prior occasions in his Blog Watch column in

As you can hopefully tell, I have a strong interest in shareholder democracy and value creation. I am happy to highlight managements that "get it" as well as those that seem to be plodding along without treating minority shareholders as true partners. I am happy to highlight analysts who in my opinion are providing useful logical advancement to understanding a business. As well, when analysts are merely cheerleaders, I love to highlight that as well. Interesting 13-D filings can be mentioned, ongoing proxy battles can also be highlighted here. The purpose in all of this is to entertain, to provide some education and encourage understanding, and to help us all engage in some collective logical thought. Bottomline, if you find the kernel of an investment idea, do your own thinking and examine your own risk profile. I provide no investment advice through this is impossible to do so because I cannot know an idea's appropriateness for you without knowing you. When the disclaimer says that there is no investment recommendation here, that is what is meant. I provide honest, and hopefully straight-forward opinion, not recommendations or advice. I do appreciate your feedback and commentary as to whether you agree or disagree with what I have published here.

I am not entirely sure that I agree with James' contention that there is not much difference between a corporate raider of the 80's and an activist shareholder, though many current activists certainly do fit this kind of role.

There are certainly some activists who use the force of their name to influence change. Essentially, with a short term hedge fund mentality, they buy a few percent ownership in a company to "pick a fight." Nelson Peltz may well be an example of this kind of activist. Though Peltz may well have been the primary influence in CBRL Group's (CBRL) decision to "review potential capital structure initiatives," there has not been a 13-D or even 13-G filing which indicates his ownership of a stake in the company. Conversely, there was a 13-D filing in the case of Wendy's. As of Friday, no Heinz 13-D or 13-G associated with Peltz has yet appeared, though the intent to file a proxy opposing management has been communicated. It is rumored that Mr. Peltz's position in HNZ is largely stock options that he could (or could not) exercise. In my opinion, it is difficult for one to argue about long term interests of all shareholders when one's interest consists of merely a short-term side bet on the direction of the stock.

I am not a shill for Heinz management either. Please note that I have come down hard on executive compensation, poor returns, and under-management of this company.

On the other hand, there are activists who have an investment horizon that extends beyond settlement date! A great example of this kind of thinking is VA Partners of San Francisco, an affiliate of ValueAct Capital, a firm that has taken meaningful positions in companies over long periods of time and appears to have had profound influence in changing management's capital allocation behavior and free cash flow generation.

In my opinion, corporate activists need not "throw the bums out." Influencing management behavior can come from participation on the board and legal actions. but moral and social suasion can also have an effect. The ability to communicate management capital mis-allocations, or misdeeds to the board and to other minority shareholders is another important attribute of these kinds of activists. The first step is recognizing that a company does have a problem or an unexploited opportunity. Spotlighting it for management and fellow shareholders exposes it to the light of day. Members of the affected management will respect and listen to these kinds of shareholders. Activists who provide this type of guidance are not in for a short term "pop" or "punt." They truly are interested in building long-term value. Clearly, this is not charity on their part. They participate in the long term gains that are achieved through enhanced shareholder value creation.

Best of all, the rest of us can ride the coattails of such long term activists' success. The primary focus of an activist in my opinion tends to focus on return on invested capital and its potential improvement. There are only two avenues to navigate to improve ROIC, (1) to reduce costs and improve the profitability , and (2) to reduce the amount of invested capital employed.

We hope to highlight in the coming weeks a few examples of successful corporate activists, their targets, and the subsequent results. As well, we will look at a few companies that, at least in my view, could use some prodding to improve their ROIC and their shareholder value creation strategies. Ultimately, shareholder value comes from only one place...the ability of a business to generate ROIC in excess of its cost of that capital.

Please let me know of any opportunities that you see that you think I should examine.


At 5:12 PM, Blogger muckdog said...

Rick, I think the appropriate greeting would be "Booyah!"


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