Activists Adapt

With credit nearly non-existent, the traditional playbook of activist investors has been rendered almost obsolete, but activism is far from dead.

For the past five years, the playbook of activist investors might resemble the old "straight T" offense employed by the Oklahoma Sooners football team in the Fifties; its brilliance was in its simplicity. Investors could quietly build up a stake in a business, and then a few months later go public with the notion that the targeted company should seek a sale. It was almost too easy, although with credit nearly non-existent, such a strategy has been rendered almost obsolete.

That doesn't necessarily mean that activism is dead. Take the recent 13D filing from Trian Fund Management, which went public with its 7% stake in Dr. Pepper Snapple Group in December. Nowhere in its filing did Trian mention a possible sale.

Rather, the activist's blueprint revolved around a stimulating a "sharper strategic focus, better operational execution and more efficient uses of capital." A divestiture of the Dr. Pepper's bottling operations could be a part of the plan, though the strategy does not appear to be as reliant on M&A, or more specifically an auction for the entire company, as past endeavors from activists. Trian, it should be noted, has historically used a blueprint focused on execution.

In many cases today, activists will keep the option for a sale open, but at the same time they seem to acknowledge that a deal offering a premium to share price is no sure thing. When Simcoe Capital and Jeffrey Jacobowitz built up a stake in Telular, the investors pushed for the company to use its strong cash position to either "aggressively repurchase shares and to consider paying an ongoing cash dividend" and also cautioned Telular management to adopt an "extremely cautious approach to acquisition activity."

In its letter, Simcoe also floated the possibility of strategic alternatives but added the caveat that only "under the right circumstances, at the right time and for the right price," would such a strategy work. Simcoe also added that its nominees for the Telular board have "no current plan or proposal" to pursue a sale.

The state of the credit markets has quite obviously made activism more difficult, and with the economy now in a recession, even operational fixes can be tough. Most companies are already doing what they can to trim costs, and excess cash on the balance sheet, most recognize, is no longer a low-hanging fruit for activists as this cash provides a much needed cushion in light of the illiquid environment.

"I don't see a lot of sabre rattlers right now telling management teams that they have all the answers," says Keybanc Capital Markets managing director Leland Harrs, who works in the firm's chemicals group. "If they did, I think those suggestions would probably be welcomed," he adds.

Of course, many activists are essentially stuck with a position in a company after having missed its window for a possible sale. These groups are unlikely to just unload their positions and swallow a loss. Instead, many investors will simply retool their approach.

"I have a hard time seeing [activists] quietly going away, and not worrying about the large holding that they may have in a company," says Harris Williams & Co. managing director Tiff Armstrong, who notes that at the same time he doesn't expect these investors to be in a position where they can "advocate a sale."

Sandell Asset Management has been a stakeholder in Southern Union since 2006, an investment that represents roughly a quarter of the firm's domestic portfolio. Three years ago, the plan was for Southern Union to either sell the company or convert to a master limited partnership. Today, though, the firm has to angle for corporate governance and operational changes. It is perhaps a more modest goal, but it allows the investors to maintain an activist posture with objectives that are still attainable.