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Haven Financial ServicesIndependent Research Event
March 11, 2010 Webinar
Shareholder Activism: Realizing Abnormal Stock Returns
For Additional Information Contact:
Cory Wolf, Director of Operations & MarketingHaven Financial Servicesa division of APB Financial Group
“Effectiveness of Hybrid Boards”Does Activism Increase Shareowner Returns?
Jon Lukomnik
Program Director, IRRC Institute Webinar, March 11, 2010
Effectiveness of Hybrid Boards• Why the study: There has been a significant rise in activism resulting in “hybrid boards”– 18 in 2005
– 45 in 2008
Source: Schor, Michael and Greenwood, Robin Marc, "Investor Activism and Takeovers," available at http://ssrn.com/abstract=1003792.
Activist 13D Filings
0
40
80
120
160
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Hedge FundNon-Hedge FundTotal
Effectiveness of Hybrid Boards• Looked at 120 hybrid boards, 2005‐2008
• Activists gained board representation in 75% of companies targeted
Method of Resolution
2005 2006 2007 2008 Total 2005 2006 2007 2008 TotalSettlement 13 24 18 36 91 72 % 77 % 69 % 80 % 76 %Shareholder vote 5 7 8 9 29 28 % 23 % 31 % 20 % 24 %
Total 18 31 26 45 120 100 % 100 % 100 % 100 % 100 %Year-over-Year increase/(decrease) 72 % (16)% 73 %Increase vs. 2005 totals 72 % 44 % 150 %
Number of Contests Percentage of Contests
Effectiveness of Hybrid Boards
• Companies in which activists gained board seats outperformed by 1660 basis points (16.6%) from the date of the contest through a year after election date
• There was dispersion in the results– 60% outperformed, 40% underperformed
“Contest effect” accounted for more than half of abnormal return
Effectiveness of Hybrid Boards
• Excess returns decrease over time
• For companies with 39 months of history (contest period plus 3 years), excess return was 17.8%.
• However, excess return for 3 years post contest (therefore excluding contest effect) was actually negative: ‐6.6%
Caution:Small sample size (n=15) for 3‐year companies
Effectiveness of Hybrid Boards
• Outperformance was associated with level of ownership by activist– 67.7% excess return when activist owned >10% of the shares entering the contest
– Modest outperformance when activist owned 5‐10%
– No outperformance when activist owned <5%
Effectiveness of Hybrid Boards
• CEO left company in 49% of cases– Similar to overall rate in America– However, 15% were dismissed; 3x overall rate
• New chairman: 21%• Board declassified: 13%• Board size changed: 12%• Other common governance changes: Split CEO/Chair 8%;
Majority vote 6%, Redeemed poison pill 6%.
24% of the 2005‐2007 companies were sold (1.8x market).Surprisingly, when a sale was an explicit insurgent goal, a
sale was marginally less likely.No evidence of systemic short‐term bias overall.
Background: Why it works• Back to basics: What is excess return?
– Alpha plus a residual, with alpha defined as the expected non‐market excess
– Most value‐added strategies focus on alpha, since it would appear that deviation from expectations can’t be managed
“Before the fact, the best guess is that [r] will be zero. After the fact, it almost certainly will not be. Unexpected good news will cause [r] to be positive, while unexpected bad
news will cause it to be negative”‐‐William Sharpe
Background: Why It Works
• Activism works on both alpha and residual– Alpha through security selection– Implementation tries to “create unexpected good news”to make [r] positive
• Causes market to focus on what activist sees in company• Raises possibility of value realization
– Results in market re‐rating as possible value realization becomes investment thesis
– Consistent with contest effect and short‐term re‐rating– Can be thought of a similar to merger/take‐over bid.
• Activist involvement raises value of target to maximal fair value, with only implementation gap remaining in valuation.
• Hence importance of “contest effect”
“Effectiveness of Hybrid Boards” is available at no cost.www.irrcinstitute.org
Please go to the web site and click on “projects”Feel free to sign up for notice of future IRRC Institute studies
Jon LukomnikProgram DirectorIRRC Institute
CATALYST INVESTMENT RESEARCH
Damien Park, Managing PartnerJon Heller, Partner
About Hedge Fund Solutions, LLC
Hedge Fund Solutions is comprised of highly skilled and seasoned professionals, providing deep core competencies in advising management and investors associated with
undervalued public companies involving activist investors
Activist Investing Specialists
Consulting
Investment Research
EducationInstitutional Investors | Public Companies
• Proxy Campaign Management• Analyze Value Gaps & Vulnerabilities• Investor Profiling & Intelligence• Corporate Governance Improvement• Stakeholder Communications• Investor Outreach & Targeting• Settlement Negotiations
• Daily Activist Email Alerts• Weekly Analysis (FREE)• Company-Specific In-depth Analysis• Quarterly Buying & Selling Analysis• Special Reports• Access to Specialists & Activist Investors
Catalyst Investment Research™
Institutional Investors | Public Companies
• The Shareholder Activism Report & Shareholder Activism Resource Portal
• Interactive Case Study• Annual Hedge Fund Activism &
Shareholder Value Summit• Various Publications• The Official Activist Investing Blog™
Daily: Email Alerts Weekly: Catalyst Equity Research Report™ Catalyst Investment Research™ Report
Special Reports
Catalyst Investment Research™
Quarterly Buying AnalysisTop 50 Activists
Catalyst Investment Research™ ReportRESEARCH PROCESS
Step 1: Identify Research Candidates- Activist Investor Contacts- Regulatory Filings- Proprietary Screening
Step 2: Weekly Review Process- Top 25 Candidates- Examine Activist- Examine Company- Situation Analysis/Timing
Step 3: Engage- Company- Activist- Others: Investors, Proxy FirmsLegal, PR, IR, etc…
Step 4: Build Report/Distribute
Catalyst Investment Research™ Report
Catalyst Investment Research™ ReportRECENT EXAMPLE
Nov. 11 2009Activist Investors Clinton Group &
Spotlight Advisors Start Buying
Dec. 22 2009Activists Disclose 5.7% Ownership
Dec. 22 2009Activist Discloses Concerns:
Rigidity of business strategyOperational issues
Returns on invested capitalExecutive compensation
Board & management accountabilityManagement – in general
Dec. 25 2009CIR Weekly Report
Dec. 28 – Jan. 5Discussions w/ activist & others
Jan. 13 2010CIR Research Issued
$17.27/share
Feb. 19 2010CIR Weekly Report
March 4 2010Settlement Agreement
March 8 2010CIR Research Note Issued$23.17/share
OUTCOME:Approx. 2 Months36% Return
Catalyst Investment Research™ ReportSAMPLING OF SUCCESSFUL CALLS
Company: Tier Technologies, Inc. (TIER)Activist Investor(s): Discovery Capital & Parthenon InvestorsResearch Issued: March 4, 2009Results: 60% increase in share value within 4 months
Company: Consolidated Tomoka Land Co. (CTO)Activist Investor(s): Wintergreen AdvisersResearch Issued: April 8, 2009Results: 49% increase in share value within 6 months
4 Months60% Increase
6 Months49% Increase
Company: Tecumseh Products Company (TECUA)Activist Investor(s): Herrick FoundationResearch Issued: April 24, 2009Results: 47% increase in share value within 1 month;
78% Increase in share value within 5 months
Company: Chemed Corp. (CHE)Activist Investor(s): MMI InvestorsResearch Issued: May 8, 2009Results: 17% increase in share value within 6 months
1 Month47%Increase
5 Months78% Increase
6 Months17% Increase
Company: Enzon Pharmaceuticals Inc. (ENZN)Activist Investor(s): DellaCamera Capital ManagementResearch Issued: June 10, 2009Results: 41% increase in share value within 6 months
6 Months41% Increase
Situation: Special Report on Activist Investor Steel PartnersThe distribution of in-kind securities to LPs on July 15 caused atemporary but dramatic reduction in value at a few portfolio companies.
Research Issued: July 20, 2009Results: Avg. 79% increase in share value within 1 month
1 Month79% Increase
NEW – March 2010The Shareholder Activism Report &
Shareholder Activism Resource Portal
In Collaboration with Hedge Fund Solutions and The Conference Board, Inc.
Damien J. [email protected]
www.hedgerelations.com
For Additional Information Contact:
