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This Hedge Fund’s Stance on Struggling Company Starting to Bear Fruit

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A freshly-amended 13D filing with the SEC discloses that Sandell Asset Management, founded by Tom Sandell, reached an agreement with Viavi Solutions Inc. (NASDAQ:VIAV) stipulating that two new candidates are appointed to the company’s Board of Directors, among other things. Let us remind you that Tom Sandell’s team sent a letter to Viavi’s Board on September 1 suggesting a set of measures that the company needs to undertake in order to unlock shareholder value (read more details). At the same time, Sandell Asset Management reported an ownership stake of 12 million shares, which include 6 million stock options and 375,536 shares in cash-settled equity swaps.

Thomas Sandell

Prior to diving into the substance of the agreement, we will provide a brief introduction to Thomas Sandell’s investment firm. Sandell Asset Management is an alternative asset management firm established by the Swedish investment banker, Tom Sandell, in 1998. The New York-based firm takes on a corporate event-driven, multi-strategy approach to investing by focusing on equity special situations and credit opportunities. The investment firm is seeking to include only the most attractive risk/reward opportunities in its portfolio, which points to the fact that there is a great deal of value that Tom Sandell and his team are trying to unleash at Viavi Solutions. As stated by the latest round of 13F filings with the SEC, Sandell Asset Management oversees an equity portfolio with a value of $941.48 million as of June 30.

Tom Sandell
Tom Sandell
Sandell Asset Management

Following activist funds like Sandell Asset Management 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 Sandell Asset Management 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 activist hedge funds have been much higher than the returns of an average 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 36 months since our small-cap strategy was launched it has returned over 118% and beaten the S&P 500 ETF (SPY) by more than 60 percentage points (read more details).

Let’s now center our focus on Viavi Solutions Inc. (NASDAQ:VIAV) and its recent agreement with Sandell Asset Management. Viavi Solutions, formerly known as JDSU, is a provider of network and service enabling solutions and optical products for the telecom industry. The company lost some of its charm within the hedge fund industry, as the number of money managers with stakes in Viavi decreased to 23 from 30 during the second quarter. Similarly, the value of these stakes declined to $290.82 million from $354.70 million during the April – June quarter. However, it is also worth mentioning that the hedge funds bullish on the company stockpiled 10.70% of the company’s outstanding common stock as of June 30. Aside from Tom Sandell’s firm, Clint Carlson‘s Carlson Capital and George Soros’ Soros Fund Management are two other top shareholders of Viavi Solutions within our database, holding stakes of 6.3 million and 6.27 million shares, correspondingly.

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Going back to the agreement between the two parties, Donald Colvin and Tor Braham filled in two positions on Viavi Solutions Inc. (NASDAQ:VIAV)’s Board of Directors, extending the Board to eight members, which includes one position from the soon-to-be appointed CEO. At the same time, the freshly-appointed directors will also join the re-purposed Corporate Development Committee that is set to evaluate possible opportunities for enhancing shareholder value in the following aspects: the company’s business, financial position, capital allocation, investment and business strategies, and the value of the company’s deferred tax assets. Under the terms of the agreement between Viavi Solutions and Tom Sandell’s team, the company is also set to resume its previously-announced share buyback program and acquire up to $40 million of common stock. Furthermore, the company needs to come up with new equity compensation arrangements that would take into account stock buybacks and dividends distributed.

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