Schafer: Activist shareholders' demands now a fact of life

The e-mails a month or so ago were unfailingly polite and very insistent. The principals of Spear Point Capital Partners really wanted to chat about Imation, a data storage company whose sales have been shrinking.

After the third round trip of e-mails, it dawned on me what they wanted.

Spear Point had to be an activist shareholder. They were going to take a run at Imation, and getting to know local newspaper writers could help get publicity when they start pressuring the Oakdale-based company's board of directors to take some action they wanted.

With that realization, any remaining interest I had in a long conversation with Spear Point quickly evaporated.

In late 2014, an activist shareholder asking that a public company CEO be fired — as Spear Point subsequently did — is no longer really news.

Sure, there's always some drama when someone starts making demands. But shareholder activism — buying a small stake and then advocating dividend increases, divestitures or even replacing the entire board — is becoming boring. It's just another investment style, like buying growth stocks or high-yield bonds.

The officers and directors of public companies — the people who receive the letters demanding they be replaced — won't like hearing this, but it's increasingly business as usual.

There's more money than ever in shareholder activist funds, too, about $90.6 billion at the end of October, according to analyst Peter Laurelli of the New York research firm eVestment. That's up from $74.5 billion at the end of last year and about $59 billion the year before.

He said he now tracks about 90 sizable investment funds with an activist style, while about 15 years ago that would've fewer than 20.

One of the reasons the activist strategy is increasingly popular, Laurelli said, is that such investors only have to buy a small fraction of a company's shares to get a chance to work directly with the CEO and board to influence decisions such as buying or selling divisions or paying dividends.

That influence comes without having to raise all the money that would be necessary to actually take over a company, typically at a premium price, as a private equity firm would have to do.

It's important to understand that the investors stirring up the trouble are professional agitators, not long-term investors in a particular company who have grown weary of poor financial results. The activists, typically hedge fund managers, carefully sift data looking for a public company where a little pressure could nudge the board toward changes that could boost share prices.

"In the good old days, it was the Fortune 500s" that faced hostile takeovers or dissident shareholders, said Eric Martinuzzi, a senior analyst with Lake Street Capital Markets in Minneapolis who follows Imation. "Over time, the activists have come marching down the pyramid, to smaller and smaller companies."

Martinuzzi had never heard of Spear Point before this fall, but he sure is familiar with shareholder activism. Of the 16 public companies he actively follows for Lake Street Capital, six are wrestling with an activist.

With all this activity in the market, it is hardly surprising that both Fredrikson & Byron and Faegre Baker Daniels just hosted well-attended seminars to help get corporate lawyers, directors and executives up to speed on how these investors think.

"When we are asked to come in to corporate boardrooms … the No. 1 thing our clients want to learn about, talk about and get advice on is shareholder activism," said Faegre Baker Daniels partner Mike Stanchfield.

What the directors and senior executives hear is that they need to take a hardheaded look at their companies through the eyes of an activist, to see the vulnerabilities before the activist does. His other simple advice is to talk regularly with shareholders, large and small.

Another mark of how mainstream activism has become, Stanchfield said, is that activists are getting far better candidates to agree to stand for election in any contested election for board seats. The quality of their analysis of the companies they target has gotten a lot better, too.

Earlier this fall there were headlines about an activist shareholder who wanted to toss out the entire board of a big public company, Darden Restaurants, over free breadsticks. The investor, Starboard Value LP, complained that Darden's Olive Garden unit gave away far too many breadsticks, plus they didn't taste very good, anyway.

Breadsticks may have been easy to joke about, but limiting them was just one suggestion contained in a nearly 300-slide PowerPoint presentation about what Starboard insisted should be done differently. Shareholders subsequently agreed, and Starboard got its slate elected to the board.

Spear Point Capital has also made a set of suggestions to Imation's board. As Martinuzzi pointed out, however, the first public letters from an activist shareholder all sort of sound alike, complaining of poor returns and how the management team has bungled.

Imation has plenty of challenges, he said, but he sure wasn't willing to echo Spear Point's criticism of Imation CEO Mark Lucas.