The activist hedge fund industry oversees approximately $120 billion in assets under management, which enables activists to acquire stakes even in the largest U.S. public companies. But hedge funds’ available capital is not necessarily too important, as the success of an activist’s campaign solely relies on his ability to persuade shareholders that his strategy, be it related to capital allocation or operating efficiencies, will create more shareholder value. A total number of 355 activist campaigns against U.S. publicly-traded companies were announced last year, with 127 of them resulting in the appointment of at least one activist-nominated Board member. With that in mind, the following article will discuss three SEC filings related to several ongoing and completed proxy fights.
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Third Letter to Benchmark Shareholders from Engaged Capital
Earlier this week, Glenn W. Welling’s Engaged Capital LLC issued a third letter to Benchmark Electronics Inc. (NYSE:BHE)’s shareholders in connection with the ongoing campaign to elect three directors at the company’s upcoming meeting of shareholders, which is set to take place on May 11. The activist investment firm, which owns 2.43 million shares of the provider of integrated manufacturing, design and engineering services or 4.9% of the company’s outstanding shares, also issued a presentation that underlines “flaws” in the company’s most recent presentation to investors. So let’s take a brief look at several major points of discussion between the two parties.
While Benchmark Electronics Inc. (NYSE:BHE)’s management and Board claim that the company has outperformed peers since 2011, which is “the only starting point in the last decade where the Company can claim any modicum of outperformance” according to Engaged Capital, the activist shareholder asserts that Benchmark has significantly lagged behind all relevant peers and stock market gauges on both a short and long-term basis. Moreover, Mr. Welling and his team continue to criticize the company’s inability to manage working capital, saying that Benchmark Electronics “is the only company amongst their EMS peers that pays their suppliers faster than they collect from their customers, tying up ~$300M of shareholder’s capital”. One of the three Engaged-nominees commented on the company’s working capital, saying that “BHE’s working capital represents a significant opportunity for value-creation”. Furthermore, Engaged Capital also criticized Benchmark’s acquisition of Secure Communication Systems, which produces encrypted and ruggedized communication systems, avionics displays and military-grade components, completed in November 2015. Precisely, the activist firm claims that “BHE paid more for a non-core asset that was intrinsically more valuable to the other bidders”, saying that the acquisition reflects the Board’s “lack of understanding of how to evaluate capital deployment alternatives”.
Shares of Benchmark are down 20% in the past 12 months, partly owing to the disappointing first-quarter earnings report recently released by the company. Royce & Associates, founded by Chuck Royce, owned 2.43 million shares of Benchmark Electronics Inc. (NYSE:BHE) on December 31.
Let’s head to the next pages of this article, where we will discuss two separate activist campaigns.