If Warren East, the new chief executive of Rolls-Royce, wants to sleep well at night, he should probably avoid reading one of the two rotating quotations on the front of the website of ValueAct Capital, the San Francisco-based activist hedge fund that recently unveiled a stake in the British aircraft engine maker.
It comes from the legendary investor Warren Buffett, and is a warning to any chief executive in charge of an under-performing company.
Buffett, in a view evidently endorsed by ValueAct, says: “True independence, meaning the willingness to challenge a forceful CEO when something is wrong or foolish,is an enormously valuable trait in a director. It is also rare. The place to look for it is among high-grade people whose interests are in line with those of rank-and-file shareholders – and in line in a very big way.”
Over the past 14 years Jeffrey Ubben, ValueAct’s chief executive and chief investment officer, has been behind some of the world’s largest corporate shakeups where he has rarely been unwilling to challenge a chief executive.
He has instigated a full-scale shakeup of food and beverage group Sara Lee, offloading its tea and coffee businesses; he has helped guide financial news and data firm Thomson Corp into the arms of Reuters; and he has been involved in a management shakeup of Microsoft, where the group’s input helped ease the exit of Steve Ballmer.
In all, Bloomberg calculates that ValueAct has pressed for changes at 75 companies since Ubben co-founded the firm in 2000.
Ubben is known as the quiet activist because of his aversion to publicity. He rarely goes in for the public slanging match that characterised, for example, the prolonged attack on Katherine Garrett-Cox’s management of fund manager Alliance Trust by the activist group Elliott.
Ubben’s core investing principles, as outlined in a presentation to the Value Investing conference in New York in 2012, look innocent enough. Under the heading What We Like, ValueAct says: “We like the company to be business model-focused, not industry-focused, we like disciplined oligopolies; we like fee-based recurring revenue models [very appropriate for Rolls-Royce’s plane engines business], and we like low-risk analysis financial statements and proven management teams.”
Equally important is what ValueAct doesn’t like, the presentation continues. It says: “Don’t go looking for problems to fix; be careful of founder-led companies, pick your battles and sometimes it’s easier to sell. Value destruction from poor governance can happen very quickly.”
There is no doubt that if the long-term gain doesn’t look like coming. ValueAct will press for change quickly and aggressively unless he decides to sell early instead. Ubben is unafraid to go hostile if he has to, as he did when MSCI, the stock market indexes company, refused to put one of his representatives onto its board.
In the past few days, ValueAct has made its presence felt firmly in UK boardrooms, first taking a disclosable 5%-plus stake in Rolls-Royce, and then on Monday emerging as a shareholder in the struggling Smiths Group.
Despite its record of creating discord in some situations, where management has been unresponsive, both Rolls-Royce and Smiths Group believe they can have a positive rather than confrontational relationship with their new shareholder.
Rolls-Royce’s senior management, who have held “constructive” conversations with ValueAct over the past few days, are confident that the fund is going to work alongside its new chief executive, one of whose first tasks on coming on board was to deliver a profits warning.
According to sources close to the group, both management and ValueAct share the same aim, which is to cut costs in the aerospace business. “I think we’ve got to be thinking here about what experience can [ValueAct] bring to the corporate turnaround,” said a source close to the group.
Smiths is due to welcome in a new chief executive in September and it too is hoping for a harmonious relationship. “We welcome any input into the future running of the company in the interests of all shareholders,” said a source.
In 70% of situations, ValueAct has seen the share price of a company in which it has invested rise sufficiently for it to sell out at a sizeable profit. Shareholders and management at the two UK groups will be hoping for a similar outcome.
ValueAct isn’t the only activist investor to have been besieging UK boardrooms recently.
Alliance Trust, the Dundee-based fund management group, faced a major battle with one of the most aggressive activist investors in the world, New York hedge fund Elliott Associates, earlier this year.
Alliance Trust, whose chief executive is Katherine Garrett-Cox, endured a sapping campaign from Elliott over several weeks, with its investment performance, high costs and excessive executive remuneration, being attacked ahead of a shareholders’ meeting in April.
In the end Alliance Trust, which had been targeted by another activist fund in 2011, brokered a deal with Elliott, which is headed by Paul Singer. Sensing possible defeat, Alliance invited two of the fund’s representatives onto its board and agreed that Garrett-Cox has a year to improve on her performance or face being ousted.
Many saw the compromise deal as a success for Elliott, given that Garrett-Cox is now on trial in a way that she has never been before.
Elliott got a lot further than it did two years earlier in the UK, when it took a 17% stake in transport group National Express and lobbied for its sale or breakup. It retreated a year later, having failed to find support from other investors for the plan.
Elsewhere in Europe, the New York-based P Schoenfield Asset Management pressured the French media conglomerate Vivendi to increase a special dividend after an asset sale.
Investors in UBS and John Menzies have also sought spin-offs or board changes in recent months.
And a few weeks ago, Crystal Amber, a UK-based activist fund, picked up a stake in Pinewood, the film studios group, in a share issue and immediately threatened to launch a renewed attack on its chairman, Lord Grade.
Crystal Amber last attacked Lord Grade in 2010, calling for his removal, but was thwarted, eventually selling its 28.3% stake.
