Unlocking Activist Investing

June 20, 2024

Friends,

I am excited to share this interview with Ken Traub, Managing Partner of Delta Value Advisors, a strategic consulting and investment advisory firm specializing in corporate governance and turnarounds.

Ken has had a long and successful career both as a CEO and as a director of numerous public companies, including many turnarounds and exits.  He also spent 3 years as a Managing Partner at my former hedge fund, Raging Capital, where I had the luxury of working with Ken on numerous projects.

Ken shares a lot of wisdom in this interview, including lessons he has learned as a turnaround CEO, what it takes to be an “activist” director on a corporate board, and some thoughts on activism as an investment strategy.

I am also excited to announce Raging Capital Ventures’ 3rd annual Ideas & Networking Conference on September 19, 2024 at the Standard Hotel – High Line in New York City.  We have confirmed four outstanding speakers, including:

• Sol Bier, Founding Partner of Factorial Funds, a venture capital firm focused on AI and tech investments
• John Serafini, CEO of Hawkeye 360 and a leading defense-tech investor
• Brian Bellinger, CIO of Monimus Capital and former Managing Partner of Raging Capital
• Ken Kurson, Founder & CEO of Sea of Reeds Media, former editor in chief of the New York Observer, and co-author of Rudy Giuliani’s best-selling book, “Leadership”

The event will start with lunch at 12:30 PM and conclude with cocktails on the High Line River Terrace starting at 3:30 PM.  See below for more information on the Speakers and Agenda and click here to register.  Space is limited — I hope you can attend!

I hope you find value in this interview.  Enjoy the summer!

Best Regards,

 

William C. Martin

Topics in this Issue of An Entrepreneur’s Perspective:

• Interview with Ken Traub, Delta Value Partners: Unlocking Activist Investing
• Ideas & Networking Conference: Speakers & Agenda, Register Now!
• Favorite Podcasts & Media
• Recent Tweets from @RagingVentures

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Interview with Ken Traub, Delta Value Partners: Unlocking Activist Investing

We first got to know each other in the early 2000s when I invested in American Bank Note Holographics (“ABNH”), a company that you were working to turnaround as CEO under some interesting and challenging circumstances.  Can you share that experience with us?

American Bank Note (ABN) was an interesting company.  It traces its roots to its founding in 1795 and was the original printer of American currency, or bank notes.  For many years, ABN was the largest supplier in the world of secure documents such as currency, credit cards, passports, stock certificates, etc.  In the early 1980s, ABN pioneered the use of holograms to help authenticate documents and prevent counterfeiting, and pursued that nascent market through a new subsidiary, American Bank Note Holographics (ABNH), which became the market leader in the secure hologram market.  In 1998, ABN spun off ABNH in an IPO and as part of the IPO process, it promised it would hire a new CFO for the newly independent ABNH.  I thought this was a very interesting opportunity and I accepted the job of EVP and CFO of ABNH starting on January 12, 1999.

On my first day of work, I met with ABNH’s auditors at Deloitte and Touche (D&T), senior management at both ABN and ABNH, and customers.  Shockingly, by the end of my first day I was certain that the company’s 2 most recent 10-Q’s required restatement and nobody in the company or D&T appeared to be aware of this yet.  On my second day of work, I met with the board of directors of ABNH and resigned as CFO.  Following that, D&T dug deeper, and concluded that all of the previous financial statements that they had previously audited were materially misstated and withdrew all prior audits.  This created an enormous crisis:  Chase Bank declared defaults on the outstanding bank debt precipitating a liquidity squeeze; the SEC and DOJ commenced investigations; numerous lawsuits were filed; the NYSE delisted the stock; customers were terminating contracts; suppliers were cutting the company off; key employees were quitting, etc.

During this crisis, the board came back to me a few weeks later and said they decided to terminate the President and offered me the job of President and Chief Operating Officer reporting to the Chairman/CEO.  I accepted the job knowing that the company’s viability as a going concern was now in serious jeopardy.

Shortly after I started the job as President, it became clear to me that the mistakes I and D&T had found in the financial statements were no accident, but was part of a deliberate, multi-faceted fraud.  But worse yet, I discovered abundant evidence that the fraud was directed and overseen by my new boss, the Chairman/CEO.  I presented my findings to the independent directors and discovered that there was one primary credential for board membership at this company and that was loyalty to a CEO that I now believe directed a massive fraud.  I fought with the board, and with the assistance of Chase and the DOJ and SEC, I forced all of the directors that were aligned with the CEO to resign and I fired my boss.  I then became the CEO.  I fired every member of the management team and senior financial staff and was the only officer of the company for a period of time.  I also recruited an entirely new board of directors and started to resolve all of the problems I inherited from prior management.

One additional challenge I faced while managing the turnaround of ABNH was that a group of activist shareholders who owned about 20% of our stock filed a 13D and then a proxy statement proposing to keep me but replace the entire new board of directors with their own candidates.  My first reaction was outrage that these activists would seek to replace the entire new board who I trusted and was supportive of the turnaround I was managing.   But ultimately, I came to realize that they had a valid point – I personally handpicked every director and never asked shareholders for their input.  I thought I had good reasons to do that since former management committed fraud and the problems ran so deep that I wanted to make sure I could trust the board.  But the activist’s point was, as the CEO managing this complex situation, I should be reporting to an independent board that can independently and appropriately hold me accountable.  It wasn’t easy to see at first – but they were right so I settled with the activists and brought their directors onto the board.

With the new board, I executed a successful turnaround and earned trust back from key stakeholders and rebuilt a market leader in product and document authentication.

We sold the company in 2008, and as you know, shareholders that stayed for the ride, earned returns exceeding one thousand percent (1000%).

Wow!  That is quite a saga!  Can you share with us some of the major lessons learned from your time at ABNH?

Harvard Business School actually wrote a case study entitled, “Ken Traub at American Bank Note Holographics”, and there are some compelling lessons in the case.  From my own perspective, here are some of the major lessons:

1. Trust is the most essential key to success in business, especially in turnarounds. There is no way I would have been able to save ABNH from the crisis resulted from former management’s fraud if I did not earn the trust back from the key stakeholders.
2. Focus on key priorities. There were so many issues that threatened the viability of ABNH – ranging from DOJ and SEC investigations and prosecutions, widespread corruption, massive litigation, bank defaults, customer cancellations, supplier cutoffs, etc. – and each of these issues had to be addressed with the urgency and sensitivity they demanded.
3. Governance is important. The original board of ABNH neglected their responsibility to oversee management and ensure the company was acting with integrity and legally.  It failed.
4. Shareholders have rights that need to be respected. While I thought I was justified in hand picking every director considering the crisis I stepped into and the turnaround I had to manage, the activists were right to point out that as the CEO I should report to an independent board.  Bringing shareholder representatives onto the board was helpful as we continued the turnaround and delivered value for shareholders.  Management and the board should always remember that they are accountable to the shareholders.

How did that experience at ABNH shape your career and what you have focused on since then?

After selling ABNH to JDSU, I became interested in applying the above lessons to investing in undervalued public companies in which my turnaround and governance experience could be helpful.  I therefore developed my own style of shareholder activism and brought an advantage in that I can speak management’s language.  You and I have had the good fortune to work successfully together on a number of activist campaigns both behind the scenes and publicly where we brought constructive ideas to help boards and managements of undervalued companies build and unlock their value.

My primary interest is to understand why a company has underperformed and identify the steps that can be taken to address the underperformance and lead it back to a positive trajectory.

I love this kind of work since it is like solving a puzzle and it has brought me into so many interesting companies and industries.  I have been fortunate to have served as an actively engaged member of the board of companies in such a broad range of industries ranging from semiconductors, software, telecom, biotech, manufacturing, retail, energy and media.  It is energizing to learn the dynamics of these varied industries and identifying the pivotal issues that will enable the company to address the challenges they have been facing and capitalize on opportunities to deliver value for shareholders.

You have been involved in shareholder activism from all angles – as a CEO who defended against activists, as a director nominated by activists, and as an activist investor.  Can you share your views on the role of shareholder activism in the capital markets?

I sincerely believe shareholder activism deserves its controversial and sometimes tainted reputation.  You and I have seen plenty of times where shareholder activists have destroyed value in the companies they target.  This can happen when the activist is pursuing their own self-interest to the detriment of the company.  It also happens when the activist doesn’t really understand the issues facing the business and they cause an expensive distraction for management that can impede the company’s execution of a good plan.

On the other hand, there is an important role for active shareholders when the company is underperforming and the board and management is either: (1) unable, or (2) unwilling to address the challenges and capitalize on the opportunities facing the company.  I think it is helpful to view the opportunity set in those 2 broad categories since they are distinct and can require different approaches.

What I mean by “unable” is that the leadership on the board and management simply does not have the skillset needed to address the issues currently facing the company.  You find this most often in rapidly changing industries such as semiconductors, software, biotech, etc. as well as in cyclical industries such as energy, commodities, etc.  The leadership team that was the right fit, for instance, when the company was ahead of the cycle and went public may not be well equipped to deal with the issues when their core product became obsolete and they need to pivot quickly to a new model.  Sometimes boards are slow to recognize that their management team doesn’t have the right skillset for the new realities facing the company, and with a little push from an objective and engaged shareholder, they will bring in experienced resources or make the necessary changes.

And what I mean by “unwilling” is that boards and management teams are sometimes reluctant to make changes even when the need for change is obvious.  This can be due to a conflict of interest in which the insiders are pursuing an agenda that benefits them while detrimental to the interests of shareholders.  This can happen in subtle ways.

One principle to keep in mind is that it is human nature to not want to admit when we make mistakes.  We are all that way to some extent.  But it becomes a problem when the leadership of a public company refuses to admit when they make a mistake which is material to the business and rather than correcting it, they double down on bad bets.  This creates opportunities for active shareholders that are willing to shine a spotlight on the mistake, pre-empt the doubling down on the bad bets and turn the company’s focus to building and unlocking shareholder value. 

OK, can you go a little deeper.  Do you think shareholder activism is a good investment strategy?  When is it attractive and when isn’t it?

It depends.

Not everyone has the ability or the stomach to challenge the board and management of a public company.  And if you do, every situation has to be evaluated from a cost/benefit perspective.  Shareholder activism can be expensive and time-consuming with no guarantee of success.  With that said, here are the key things to consider before targeting a company for activism:

1. Is the company undervalued based on either a current valuation of its assets and cash flow or its potential cash flows if changes are made?
2. Are there identifiable actions that the company should be taking that the current board and management are either unable or unwilling to take?
3. Will the board and management listen to constructive ideas so that improvements can be made privately or is a public activist campaign necessary?
4. If the activist gets sufficient representation on the board, will other directors listen to good ideas and is it practical to implement the actions that are necessary?
5. Does the activist bring the skillsets to the board that are needed to address the issues facing the company?
6. Can the investor acquire enough stock both to make the economics of a campaign worthwhile and to get a seat at the table for negotiations with the company?
7. Is the shareholder composition supportive of the kind of changes that the activist shareholder is proposing?

What is it like going on a public company board as an “activist” director?  How do you get things done, particularly when you lack control of the board?

Everyone serving on a public company board needs to recognize that he/she has just one vote in the governing body responsible for overseeing management and accountable to shareholders.  To get things done, particularly if you are coming with ideas to change strategy or policy, requires building consensus.  An activist director needs to be thoughtful in how to make the transition from outside critic (usually unwelcome) to a member of the board that works collaboratively together with other directors, but with some specific changes in mind.  This can be facilitated by immediately adding value in non-controversial areas that help pave the way for fellow directors to start to welcome your presence on the board and listen to your other ideas that may be more challenging to the status quo.  When introducing ideas that require major changes in personnel, strategy or policy, it is best to be very specific about the benefits of the change and how it is consistent with the board’s responsibilities.  In doing this, it is preferable not to criticize the past too much which generally elicits a defensive response from the longer serving directors, but to focus on how the company will be better because of the changes you are proposing.  Being effective as a director that was nominated by an activist is really an intriguing dynamic as it combines creative thinking on changes in business strategy, capital allocation, governance, etc. with the social dynamic of building a consensus among a group of people that previously may not have welcomed your presence.  When this works well, it is extremely rewarding.

At Raging Capital, we helped lead the recapitalization of Gulfmark Offshore and you joined its board after it emerged from bankruptcy.  Gulfmark then subsequently merged with Tidewater, also with our support.  Tidewater (NYSE: TDW) wasn’t easy at first, but it has turned into a great success story.  Can you tell us a bit about that story?

Absolutely.  First, let me emphasize that you deserve a lot of credit for this success story.  When Raging Capital invested in Gulfmark and helped to lead its emergence from Chapter 11, we recognized that many other investors were repelled from the offshore vessel industry due to a history of getting burned since this industry is very capital intensive, highly fragmented, cyclical depending on conditions in the energy market and threatened by ESG trends.  All these factors helped to build a thesis that when the next inevitable up cycle arrives, there will not be a flood of capital to support new capacity, and therefore the next up cycle should be longer and stronger.

I joined the Gulfmark board as Raging Capital’s representative, and within the first year of emerging from bankruptcy, the Gulfmark board decided to be acquired by Tidewater in a share-for-share exchange.  The logic of this merger was to create economies of scale, operational synergies and stronger management discipline.   Once the merger was consummated, I was not satisfied with the pace of change in integrating the 2 companies and achieving the operational synergies and improved management discipline of the new combined Tidewater that we envisioned.  I believed Tidewater needed to implement a series of changes that included improved board governance, stronger management leadership from the top down, a significantly lower cost structure, a recapitalized balance sheet.  If we could accomplish all of that, Tidewater would be well-positioned strategically to lead the industry consolidation.  The board was resistant to change, but I persisted.  Ultimately, we succeeded in replacing 7 of 10 members of the new Tidewater board of directors, replacing the CEO with Quintin Kneen (the former CEO of Gulfmark), and appointing new leaders to key management positions reporting to Quintin.  Subsequently, with the new management in place, we significantly reduced the cost structure, recapitalized the balance sheet, optimized the fleet and operational systems, and drove the consolidation of the industry with a series of major acquisitions.

All of this has both validated our original vision as well as the strategic, managerial and operational initiatives described above – as Tidewater has become one of the best performing stocks on the NYSE – with a gain of about 2000% over the past 4 years.  Well worth the effort!

Thank you for sharing such interesting insights .  Good luck!

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Ideas & Networking Conference – Speakers & Agenda

 

EVENT DETAILS

THURSDAY, SEPTEMBER 19th, 2024 – 12:30 PM

THE STANDARD HOTEL – HIGH LINE, NEW YORK CITY

THE HIGH LINE ROOM – 3RD FLOOR

LUNCH, SPEAKERS, & COCKTAILS ON THE RIVER TERRACE

HOST

William C. Martin, Raging Capital Ventures

Bill will guide you through an exciting day of thought-provoking “Fireside Chats” and discussion. Learn more about emerging trends in artificial intelligence, defense technology, venture capital, and media — as well as hear a few actionable investment ideas (and maybe talk some politics)! You can view Bill’s bio here.

AGENDA

12:30 PM // Meet and Greet

1:00 PM // Welcome

1:30 PM // Guest Speakers

3:30 PM // Cocktails on the River Terrace

 

 

GUEST SPEAKERS