Not one to mince words, KPS Capital's Michael Psaros offers a ...

20-35_Roundup.qxd 4/6/09 5:39 PM Page 20Round UpActivists AdaptThe depressed M&A market has made life harder onactivist investors, though many are retooling theirplaybook in order to stay busyBy Avram Davis“I don’t see alot of sabrerattlers rightnow tellingmanagementteams that theyhave all theanswers.”For the past five years, the playbook of activistinvestors might resemble the old “straight T” offenseemployed by the Oklahoma Sooners footballteam in the Fifties; its brilliance was in its simplicity.Investors could quietly build up a stake in abusiness, and then a few months later go public withthe notion that the targeted company should seek asale. It was almost too easy, although without credit,such a strategy has nearly been rendered obsolete.That doesn’t necessarily mean that activism is dead.Take the recent 13D filing from Trian Fund Management,which went public with its 7% stake in Dr. PepperSnapple Group in December. Nowhere in its filingdid Trian mention a possible sale. Rather, the activist’sblueprint revolved around a stimulating a “sharper strategicfocus, better operational execution and more efficientuses of capital.” A divestiture of the Dr. Pepperbottling operations could be a part of the plan, thoughthe strategy does not appear to be as reliant on M&A,or more specifically an auction for the entire company,as past endeavors from activists. Trian, it should be noted,has historically used a blueprint focused on execution.In many cases today, activists will keep the optionfor a sale open, but at the same time they seem to acknowledgethat a deal offering a premium to shareprice is no sure thing. When Simcoe Capital and JeffreyJacobowitz built up a stake in Telular, the investorspushed for the company to use its strong cash positionto either “aggressively repurchase shares and toconsider paying an ongoing cash dividend” and alsocautioned Telular management to adopt an “extremelycautious approach to acquisition activity.”In its letter, Simcoe also floated the possibility ofstrategic alternatives but added the caveat that only“under the right circumstances, at the right time andfor the right price,” would such a strategy work. Simcoealso added that its nominees for the Telular boardhave “no current plan or proposal” to pursue a sale.The state of the credit markets has quite obviouslymade activism more difficult, and with the economynow in a recession, even operational fixes can betough. Most companies are already doing what theycan to trim costs, and excess cash on the balance sheet,most recognize, is no longer a low-hanging fruit foractivists, as this cash provides a much needed cushionin light of the illiquid environment.“I don’t see a lot of sabre rattlers right now tellingmanagement teams that they have all the answers,”says Keybanc Capital Markets managing director LelandHarrs, who works in the firm’s chemicals group.“If they did, I think those suggestions would probablybe welcomed,” he adds.Of course, many activists are essentially stuck witha position in a company after having missed its windowfor a possible sale. These groups are unlikely to justunload their positions and swallow a loss. Instead,many investors will simply retool their approach.“I have a hard time seeing [activists] quietly goingaway, and not worrying about the large holding thatthey may have in a company,” says Harris Williams& Co. managing director Tiff Armstrong, who notesthat at the same time he doesn’t expect these investorsto be in a position where they can “advocate a sale.”Sandell Asset Management has been a stakeholderin Southern Union since 2006, an investment thatrepresents roughly a quarter of the firm’s domestic portfolio.Three years ago, the plan was for Southern Unionto either sell the company or convert to a master limitedpartnership. Today, though, the firm has to anglefor corporate governance and operational changes. Itis perhaps a more modest goal, but it allows the investorsto maintain an activist posture with objectivesthat are still attainable.Of course, modesty isn’t the first thing people thinkwhen it comes to activism. And for some investors, thecredit crunch has opened the door for a more contentiousoption than even a sale would present. “I’ve gotmy hands full of liquidations,” says Kenneth Yager,II, a principal at advisory firm Morris-Anderson &Associates. “Every company that I’m dealing with nowseems to be moving in that direction.”20 MERGERS & ACQUISITIONS February 2009