Some bright minds of the finance world believe that shareholder activism has surged in recent years because of increased market efficiency. Hedge funds and other investors may find it really hard to stumble upon pricing discrepancies, thanks to the surge in high-frequency trading. Therefore, activist hedge funds tend to change the future performance of some companies instead of trying to predict their future performance. A number of more than 500 activist hedge funds had over $140 billion in assets under management at the end of June, marking an increase of 18% as compared with the figure registered at the beginning of the year. With that in mind, let’s proceed with the analysis of two 13Ds (activist) filed with the SEC by two widely-known hedge funds tracked by Insider Monkey.
Following activist funds 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. An activist fund 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 38 months since our small-cap strategy was launched it has returned over 102% and beaten the S&P 500 ETF (SPY) by more than 53 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 a freshly-amended 13D filing, Jeffrey C. Smith’s Starboard Value owns 30.22 million shares of Office Depot Inc. (NASDAQ:ODP), which include call options underlying 25.00 million shares. Starboard Value owned 44.74 million shares in the supplier of office products and services as of September 30, along with an additional 4.05 million shares in call options. On February 4, Office Depot and Staples Inc. (NASDAQ:SPLS) announced a merge deal, under which Staples was set to acquire all the outstanding shares of Officer Depot. The terms of the deal say that Office Depot shareholders will receive $7.25 in cash and 0.2188 of Staples common stock. Earlier this month, the Federal Trade Commission (FTC) informed the two parties engaged in the potential merger that the FTC intends to block the aforementioned combination. In response, both companies announced their intentions to contest the FTC’s decision, but the deal is likely to fail unless the duo persuades a federal judge that “the FTC’s decision is based on a flawed analysis and misunderstanding of the intense competitive landscape in which Staples and Office Depot compete”. Meanwhile, the company’s sales in its North American Division (which accounts for roughly 43% of the company’s sales) totaled $1.60 billion for the third quarter of 2015, down from $1.72 billion reported a year ago. This decreased was mainly attributable to the company’s real estate strategy to close 400 retail stores through 2016.
Office Depot Inc. (NASDAQ:ODP)’s shares have declined by 33% this year. Meanwhile, the fact that Starboard Value has been gradually cashing out its holding in the company might suggest that the Office Depot-Staples deal will most likely fail to go through. The number of smart money investors with stakes in Office Depot declined to 47 from 49 during the September quarter, while the aggregate value of these stakes dropped to $964.83 million from $1.36 billion. Hedge funds monitored by the Insider Monkey team stockpiled 27.40% of the company’s outstanding shares on September 30. Eric Mindich’s Eton Park Capital reported owning 12.50 million shares of Office Depot Inc. (NASDAQ:ODP) via its 13F filing for the September quarter.
Let’s head to the second page of this article, where we discuss the 13D filing submitted by Broadfin Capital.