10/28/2024
Elliott Hunts Bigger Prey, Testing Limits in Barrage of Activism
Bloomberg (10/28/24) Burton, Katherine; Tse, Crystal
John Pike got the message on a brisk Wednesday morning in mid-October. Southwest Airlines (LUV) was ready to negotiate its surrender. The budget carrier blinked rather than face a proxy fight with Pike’s employer, Elliott Investment Management, the $70 billion activist hedge fund that about 48 hours earlier had publicly called for a special shareholder meeting. In the days that followed, Southwest gave Pike much of what he demanded, as well as something his firm needed in an era when activists face ever-larger opponents: Reupping its street cred as the investor you never take to the mat. If Southwest hadn’t bent at the last minute — handing over five board seats and promising to name a new independent chair — it would have pushed Elliott to wage its first US proxy battle since 2017. That’s a high-risk endeavor for the money manager founded 47 years go by Paul Singer, which has been challenging ever-larger companies. Singer, 80, has built one of the world’s biggest hedge funds, with investments spanning real estate, private equity and distressed debt. Yet his firm is most famous on Wall Street for shareholder activism — a strategy that has helped Elliott generate gains untethered to broader markets and steadied its returns. As the field of competitors thins, Elliott is now the busiest practitioner left, based on disclosed campaigns. This year, the firm has launched 12, engaging companies with a median market capitalization of about $30 billion. In addition to Southwest, it has gone after Starbucks Corp. (SBUX), SoftBank Group Corp. (SFTBY), Texas Instruments Inc. (TXN), and Etsy Inc. (ETSY). High-profile names are now the norm for Elliott. The firm has grown so much that chasing small fry isn’t worth the effort. Total assets under management have jumped 50% in the past three years and doubled in the past seven. In 2020, its activism engaged companies with a median market value closer to $15 billion. That means Elliott’s foes aren’t just better equipped — it has to push through changes capable of lifting their shares. “In activism you are looking for an event that can move the stock price in the right direction — bigger companies are harder to move,” said Mark DesJardine, an associate professor at Dartmouth College’s Tuck School of Business. Bigger companies generally have higher-quality boards and are better run, he said. A proxy fight can be more challenging, because giant companies tend to be magnets for passive shareholders rather than controlled by institutional investors who can often be more easily persuaded to back activist campaigns. Though Elliott is known for getting its way, there’s always the chance that a formidable target could fight back, persuading shareholders to reject Elliott’s slate of directors — a loss that could damage its credibility and make future campaigns more difficult. In Southwest’s case, at least one big investor, T. Rowe Price Group Inc., had already signaled it might not back Pike. In its deal with Southwest, Elliott notably gave up one of its main demands, that Chief Executive Officer Bob Jordan step down. A spokesperson for the airline didn’t elaborate on the negotiations beyond noting, “We were in contact with Elliott throughout the process.” More often, targets choose to play nice — engaging from the outset in friendlier, behind-the-scenes talks. Take Etsy, where Elliott won a board seat without the wider world knowing it had sought one until after the deal was done. It helps that it has a reputation for take-no-prisoners tactics. In one of its most fabled plays, the activist relentlessly pursued debt repayment from Argentina’s government for 15 years, at one point detaining a naval ship at a port in Ghana. While Dan Loeb, Bill Ackman, Carl Icahn, and Nelson Peltz made their names in activism, they only muster a few campaigns a year. Ackman hasn’t disclosed one since 2020, saying he’s retiring from “vocal” activism. The firm that comes closest to Elliott is Jeffrey Smith’s Starboard Value, with a half-dozen campaigns emerging this year. It’s possible that some firms may have struck additional deals privately. Pike, 51, embodies Elliott’s quieter, steadier commitment to the business. He joined Elliott in January 2003 and rose to partner by 2021. To colleagues, the image he cuts is more lanky and bookish than a swaggering hedge fund manager. That comports with the firm’s under-the-radar ethos. Most of its richest partners eschew French chateaus, superyachts and sports teams. Pike’s LinkedIn profile notes only that he works at a hedge fund. Since 2010, the longtime oil-and-gas analyst has shepherded at least six campaigns, mostly in the energy sector. Southwest marked his — and Elliott’s — first campaign against an airline. Elliott approached Southwest expecting a fight. The firm barely gave the carrier a heads-up: a phone call just a few hours before publicly disclosing a $2 billion stake. Pike’s team figured that some of the same attributes that made Southwest an attractive opportunity would also make it unlikely to cooperate. Its board was big, with many members appearing to be entrenched supporters of CEO Jordan. Indeed, one of its directors had scrapped with Elliott before. Elliott’s premonitions of a fight proved to be right — or, at least, a self-fulfilling prophesy. Southwest initially responded with a poison pill. It was more than a decade ago that Pike learned some hard lessons about how to size up an opponent. His first big battle — and one of Elliott’s longest ever — was with Hess and its CEO John Hess, whose father started the company and whose family held more than 10% of the stock, which was underperforming. But it soon became clear that Pike had misjudged the power and tenacity of his adversary. It took four months of public sparring before the two sides agreed to a deal on the morning of a proxy vote. Elliott scored three nominees to the Hess board. Yet, Pike was forced to reignite the campaign four years later, when he called for Hess to fix the oil producer or get out. From the start of the fight to Elliott’s exit almost seven years later, the stock rose almost 29% with dividends reinvested, a 3.8% annualized return. While that's a fairly modest increase, the firm, which seeks to hedge every aspect of every deal, may have made money on its oil hedge, which would have been profitable as the price of crude slid during that period. Coincidentally, the Hess name keeps coming up in Elliott’s campaigns. The firm encountered another one, David Hess, on Arconic Corp.’s board while heading toward a proxy showdown in 2017. In that fight, Elliott held more than 10% of the company and sought to oust CEO Klaus Kleinfeld. The board fought back, even as Elliott’s demands propelled the stock to a record. After Kleinfeld eventually got the boot, the board named David Hess interim CEO. When Pike turned his attention to Southwest, David Hess was a director there, too. On the surface, Elliott’s performance doesn’t look so spectacular. It has generated a 12.8% annualized return since inception, about 1 percentage point better than the S&P 500 with dividends reinvested. But its steadiness is almost unmatched in the industry. The firm has posted only two down years — declining 3% in 2008 and 7% in 1998. Singer tells investors the main goal is to chalk profits without bouts of losses — once the definition of a hedge fund. The trick is to find investments that can withstand “the stiff headwinds of continuously and steadily hedging all equity and equity-like exposure,” he wrote to clients at the end of July. Elliott’s track record shows that “lines of business were generally well chosen, and that execution was generally good enough to overcome errors, bad luck, idiosyncratic risks, and the drag of the hedging.” Since 2020, the companies engaged by its activism have had, on average, little change in their stocks in the 12 months beforehand. They have typically returned 22% in the 12 months after. At Southwest, the firm didn’t get everything it wanted. It got a smaller board, but won fewer seats — five out of 13. And despite Elliott’s attempt to oust him, Jordan will remain CEO. Yet Elliott did get the company to make changes just by knocking on its door. The airline preemptively said it would sell assigned seats for the first time in 53 years of flying and announced a turnaround plan that included creating a premium section with more legroom, adding red-eye flights and partnering with other carriers. Jordan and Pike wrapped up the agreement during a phone call late Wednesday night. The weeks of parrying with an activist made an impression on Jordan. “It’s a lot of distraction,” he said in an interview last week. “We don’t want to go through this again.”
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