Saviors or self-serving opportunists bullying managers and trading off inside information? I'm talking about "activist investors" and they seem to be the only hedge funds consistently cranking out gains lately but at whose expense?
The case study of the day is of course the merger announced today between Staples (SPLS) and Office Depot (ODP). As recently as early December Staples was focused on shutting stores and competing rather successfully online. Then on December 11th a fund called Starboard Value decided to play matchmaker. That was the day Starboard announced that it had taken a largely levered stake of 5.1% in Staples and built its Office Depot position to more than 10%. (Starboard has also taken a position in our parent company, Yahoo, and has pressed for change here too).
Starboard wasn't really taking a buy and hold stance here. Despite being new to the store and levered to the gills, Starboard took it upon itself to rather aggressively suggest Staples purchase Office Depot outright. The idea sort of makes sense, after all the office supply business isn't growing and Office Depot had just merged with Office Max, making this a one buyout way for Staples to take out the second and third biggest players in its space.
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Then again, Staples has spent the better part of the last two years trying to get out of the brick and mortar world. In fact, depending on how you keep score, Staples ranks as anywhere from the second to fourth biggest online retailer on earth. More than half of Staples revenues come from online. Office Depot has 2,200 stores and 60,000 employees.
Related: Disney skates to new high; GM jumps; Staples and Office Depot make it official
So while Starboard has about $250 million in less than two months trading on entirely material non-public information, Staples is going to spend the next five to ten years fighting the FTC, closing stores and feeding about 40,000 retail workers into the paper shredder.
This used to be called "corporate raiding" and other less flattering terms. Now, led largely by Carl Icahn, activists have cast themselves as champions of shareholder value. Others like Bill Ackman don't even bother pretending to to care about strategy. He made hundreds of millions buying shares of Allergan (AGN) immediately prior to serving as the point man for an ill fated takeover by a company called Valient.
It's the strategy of the day, but the question is whether all this front running and unsolicited advice is good for the market. Who died and left these guys in charge? Why would a company like Staples be so quick to fold? Starboard is smart. In a few years I may eat these words but this deal looks like a long term wreck for anyone not looking to cash out quickly.
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