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.
Red Mountain Continues Fight with iRobot
According to a fresh filing with the SEC, Willem Mesdag’s Red Mountain Capital Partners LLC has made a definitive filing with the SEC of a proxy statement, seeking support for the election of two director nominees, including Mr. Mesdag, at iRobot Corporation (NASDAQ:IRBT)’s upcoming annual meeting of shareholders. Since the aforementioned filing does not disclose new insights about the ongoing proxy contest between the robotics company and Red Mountain, let’s focus our attention on certain points of discussion that have not been previously touched in our previous articles (read more details).
The California-based activist shareholder, which owns roughly 6.2% of iRobot’s outstanding shares, has only one “agenda” with regard to this proxy contest, which involves the creation of a culture of accountability in the boardroom. It should be noted that Red Mountain did not initially seek to replace any Board members at iRobot, but rather suggested the increase of the Board size to ten seats from eight seats and the appointment of its two director nominees. Instead, iRobot opted for engaging in a proxy contest that does no good for the company.
As a long-time observer of this proxy fight, I believe that a more appropriate decision on the part of iRobot would have been to appoint the two director nominees proposed by Red Mountain and increase the size of the Board. At the end of the day, iRobot Corporation (NASDAQ:IRBT) has implemented most value-enhancement proposals outlined by the activist shareholder at early stages of the activist campaign. Precisely, the robotics company voiced its commitment to focus on the Home Robots business and already sold the Defense and Security business, so clearly Red Mountain has served as a positive catalyst for the company’s stock performance. So why not appoint two shareholder-represented directors? Red Mountain believes that there is more opportunity to create shareholder value through increased operating leverage and margin expansion, so there is more work to be done at the company. Steven Cohen’s Point72 Asset Management acquired a new stake of 325,600 shares of iRobot Corporation (NASDAQ:IRBT) during the December quarter.
Airline Company United Continental Appoints Two Directors Following Activist Pressure
In a freshly-amended 13D filing, Brad Gerstner’s Altimeter Capital Management LP disclosed owning 11.51 million shares of United Continental Holdings Inc. (NYSE:UAL), which accounted for 3.2% of the company’s outstanding common stock. Although the position remained intact since the previous 13D filing on the company was filed in early March, which also disclosed that Altimeter submitted a notice of intention to nominate six director nominees for election to the company’s Board at the 2016 annual meeting of shareholders, the 13D was amended to include that Altimeter and the airline sealed a settlement agreement.
In fact, United Continental reached an agreement with both Altimeter Capital and Paul Reeder and Edward Shapiro’s PAR Capital Management LP, which owns 14.39 million shares of the airline company, under which the size of the Board was increased to 17 directors and Mr. Shapiro and Barnaby Harford, one of the six Altimeter-director nominees mentioned above, were appointed to the Board. Under the terms of the agreement, United Continental Holdings Inc. (NYSE:UAL) will add an additional mutually-agreed independent director to the Board within six months. As a result of this settlement agreement, Altimeter withdrew its notice of nomination sent in early March.
The shares of United Continental plummeted nearly 10% on Thursday, after the airline company issued a weaker-than-expected guidance for the second quarter. The stock is 7% in the red year-to-date and trades at a forward PE multiple of only 5.8, which is significantly below the forward PE ratio of 18.5 for the S&P 500 Index. David Keidan’s Buckingham Capital Management cut its stake in United Continental Holdings Inc. (NYSE:UAL) by 45% during the March quarter to 45,345 shares.