Talking Activism With Peregrine Systems' John Mutch

TSC: What will be your approach in selecting the companies in which you will invest?

JM: We'll look at poorly-governed companies that are undervalued compared to their peers. We'll invest if we think we can increase the value by 30%. We'll take a 4.9% to 20% stake. The 4.9% threshold is because above 5% you need to file a 13D and we want to have the option not to. We'll begin with a soft approach. Our style is more along the lines of Ralph Whitworth's Relational Investors than Carl Icahn.

Icahn is very aggressive and gets a lot of press. But our approach is management-friendly. We'll look into restructuring, consolidating a product line, acquiring another company or the sale of the company. We'll also look very carefully at the compensation and incentives that people have.

TSC: Are you getting good feedback from potential investors?

JM: We've got very good feedback from the U.K.'s Hermes, which manages the British Telecom and post office pension schemes. We also got positive feedback from CalPERS. One interesting point is that both institutions are breaking down activism as a separate asset class in their portfolio. CalPERS use a bucket called "corporate governance," and they've started doing that only recently.

TSC: Do you think that activism is becoming a more established part of the hedge fund landscape?

JM: We're seeing more hedge funds engaged in activism because of the need to deliver superior returns to investors and because of the corporate governance issues that have to be resolved. Hedge funds are becoming more and more activist-oriented in the investments they have in public companies. Whitworth said recently that often the threat of a board seat can be more meaningful than a seat.

TSC: Why the tech sector?

JM: You are seeing a huge amount of companies that are created through the venture capitalism business. You have over 3,000 software companies, and yet only 17 companies have greater than one billion in revenues. They have $100 million-$300 million in revenue, but they can't grow this business any bigger. Something has to happen. They need to grow or consolidate or evolve in different spaces and boards alone are not competent to help these companies manage those challenges.