Wasn't it only five months ago that Morgan Stanley (MS) - Get Morgan Stanley Report fund manager Hassan Elmasry threw in the towel on his 7.2% stake in the New York Times (NYT) - Get New York Times Company (The) Report? After months of protracted activism, confrontation and negotiation, one of the Times' staunchest critics decided that his battle to improve the performance of the newspaper was futile.
So, how is it that only a few weeks later two hedge funds not only acquired a sizable stake in the Times but also ran a successful campaign to get elected to the board, with the newspaper announcing plans to add two new seats for representatives from the two funds?
Why did one activist approach aimed at the New York Times meet such failure while the other proved successful?
The answer, in part: how and when you conduct an activist campaign can be critical determinants of your success.
The Hard Tack
Easily more than 80% of the people I meet who hear I run an activist fund assume that an activist, by definition, is confrontational, negative and bullying. Carl Icahn certainly has an aggressive style of engaging management, and it's worked for him over his career.
Most activists take this hard-line approach and so did Morgan Stanley's Elmasry with the Times. Through a series of letters and meetings lasting over a year, Elmasry
for its new headquarters, poor acquisitions, poor choice of executive editor, and -- most offensive to him -- the Times' sacrosanct two-tier share class structure.
He withheld votes for the Times' board in protest in 2006 and then again in 2007. Forty-two percent of his fellow shareholders joined him in last year's vote. But, nothing really changed.
At the end of the day, the Sulzberger and Ochs families retained control of the board, the share structure and the company. Elmasry retreated. Activism had failed.
Yet, it was a pyrrhic victory for the Times' owners. From the stock's peak in June 2002 until mid-January of this year, the families' value in the newspaper -- along with other shareholders -- dropped more than 70%.
Some Elmasry critics would say he was wrong to target improving the newspaper industry. After all, Bruce Sherman of Private Capital Management had recently tried activism at Knight-Ridder. But, because of rapidly declining revenue, the company had little success and was forced to sell out to competing media outlet
Many activists choose to steer clear entirely from companies with a majority-owner or dual-class structures like the Times. After all, so this thinking goes, you can have the best plans for change, but you will never have any leverage over that majority owner.
Yet, on March 17, the New York Times announced that Harbinger Capital Partners and Firebrand Partners would get two director seats on the board -- less than two months after the hedge funds first disclosed their stakes and started calling for change. How could capitulation come so quickly for so difficult a target?
The overly simplistic answer is that Harbinger and Firebrand were nice whereas Morgan Stanley was too aggressive.
Softer, Gentler Activism
Far from Icahn's dog-on-a-bone approach, Firebrand's Scott Galloway believes you catch more bees with honey when pushing companies to change. In his first letter to the Times' Chair, Arthur Sulzberger Jr., and CEO Janet Robinson, Galloway said: "There is nothing wrong with the New York Times Company that cannot be fixed with what is right with the New York Times."
described, he learned about activism after being tossed off the board of a company he founded,
. After a failed attempt to get back on the board a year later via a negative proxy battle, he took a conciliatory approach the following year and was successful. He's kept smiling as an activist ever since, using this approach at the
(with mixed success).
In this contest, although Harbinger and Firebrand urged the Times to sell off non-core assets such as its stake in the Boston Red Sox and work harder at making a success of their digital media efforts, they respected the families' desire to retain the current share structure.
Such politeness leading to success is at odds with the
, which declared that hostile activists were typically 25% more successful in achieving their aims than non-hostile activists.
However, Harbinger and Firebrand didn't succeed because they spoke in soothing tones to Arthur Sulzberger Jr. (although I'm sure it helped). Here are five reasons Harbinger/Firebrand succeeded where Morgan Stanley failed:
- They spoke softly and carried a big stick: a 20% stake in the Times. This was three times the size of Elmasry's stake. It would have been more difficult for Sulzberger Jr. to argue they were a small minority (read: crackpot) shareholder voice.
- The Times stock surged in the weeks following disclosure of the Harbinger/Firebrand stake. From Jan. 25, when their stake was made public, to today, the Times' stock price is up 35%. The market was voting with these activists before it could come to a vote at the annual meeting, and the board knew it.
- Fool me once, shame on you; fool me twice, shame on me. No activist gets a free ride when making its case in a proxy battle or withhold vote. Sometimes, as happened last year when Carl Icahn failed to get elected to the Motorola (MOT) board, shareholders give management the benefit of the doubt. Yet management better perform. Motorola didn't this past year (which is why Icahn's in the driver's seat to get his four nominees elected at this year's meeting) and neither had the Times, until these latest activists emerged. Again, the Times' board could have read the writing on the wall and decided a negotiated settlement with the activist funds, conceding two board seats, was better than the risk of them getting all four elected.
- A more difficult argument to refute this time around. Last year, shareholders were asked by Elmasry to support removing the dual-class structure. The Times pointed to how nearly all successful media companies had it. This time, the activists were essentially arguing for the company to sell its noncore assets. How could the Times run a campaign saying, "No, we strategically need to hold our stake in the Red Sox to more successfully compete in our market and defend our journalistic integrity"?
- Outside activist hedge funds are better able to lead an activist campaign than insider institutional managers with conflicting ties. Elmasry was leading the charge against the Times as a Morgan Stanley employee. Despite tacit support from the investment bank, it was clear that not all of his fellow employees were happy. The Times exploited this weakness when the Sulzberger-Ochs family decided to pull its assets under management from the custody of Morgan Stanley. Outside activist hedge funds face no conflicts of interest like this typically and can therefore speak with a stronger voice. Elmasry would have been better off following Harbinger with his aims vs. leading the charge.
Some observers, like
, claim Sulzberger Jr. was the winner in getting the hedge funds to agree to only two directorships. This keep-your-friends-close-and-your-enemies-closer argument is that Harbinger/Firebrand will be neutered from criticizing the company now that they are essentially part of the company.
I completely disagree. The country club friendliness of the Times board is most certainly going to change by having these activists in their midst. Tough questions will be asked and have to be answered. The fact that these activists got two seats is also significant: one can always second the motion of the other and have it recognized in the meeting minutes.
However, the activists would do well to remember that their success is not defined by getting on the Times' board of directors but in earning a return on their investment. So far, so good on both fronts. But, in now being on the board, it's clear Harbinger/Firebrand won't be selling their stakes anytime soon (without driving down the price).
Can they turn around the trajectory of the Times in a way that Sherman at Knight-Ridder and many other newspaper owners haven't yet been successful in doing? Keep reading.
At the time of publication, Jackson was long Motorola.
Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.