The stock of SL Industries, Inc. (NYSEMKT:SLI) spiked by more than 10% as the market opened yesterday on the heels of an acquisition offer letter sent to the company’s management by Handy & Harman Ltd (NASDAQ:HNH). According to the letter, which has no legally binding obligation, Handy & Harman offered a price in the range of $43 to $45 per share for SL industries. The investment firm working behind this is Warren Lichtenstein‘s Steel Partners, which owns significant stakes in both companies. The fund manager is also Chairman of Handy & Harman’s board and a board member of SL Industries.
Warren Lichtenstein might be considered aggressive by the management of companies that have fallen prey to his activism, but many shareholders regard these actions as necessary, as they unlock significant value for them. The fund that Lichtenstein co-founded in 1990 focuses on long-term and active value investments. At the end of the first quarter the market value of the fund’s public equity portfolio stood at $636.27 million, down from $758.45 million at the end of the previous quarter. The materials sector represented about 67% of the fund’s portfolio value. Steel Partners didn’t rate very highly in terms of diversity, as its top ten holdings constituted more than 98% of its portfolio.
Following activist funds like Steel Partners is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Steel Partners can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 32 months since our small-cap strategy was launched it has returned over 144% and beaten the S&P 500 ETF (SPY) by more than 84 percentage points (read more details). Soon, we’ll be releasing a new quarterly newsletter written by former activist hedge fund analyst Michael Bland that tracks ten or so activist campaigns at any given time.
According to the guidelines set forth in the letter, SL Industries, Inc. (NYSEMKT:SLI)’s stockholders will have an option to either receive cash or Handy & Harman Ltd (NASDAQ:HNH) stock, as long as the overall mix remains in the confines of 55% cash and 45% stock, with Steel Partners receiving only stock in commensurate with its holding. The benefits that SL’s shareholders would receive from this deal apart from an immediate hike in their equity holdings include significant cost savings, tangible synergies, and a more liquid security by being part of a larger and financially stronger company.