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Old-school activism still produces results for Dan Loeb

In the space of a few hours last week, the acid-tongued activist investor Dan Loeb walked away with two victories, showing how traditionally bruising proxy fights can still pay off — despite falling out of fashion recently.

United Technologies, the US manufacturing group, heeded calls from Mr Loeb to split into three companies. A few hours earlier, Campbell Soup caved in and granted Mr Loeb’s Third Point fund two board seats, plus other concessions, after he launched a public battle to overhaul its board, including legal threats against directors.

Mr Loeb, a 56-year-old yoga enthusiast who encourages his employees to meditate at work every day, is a throwback among an increasing number of activists who are redefining their investing strategy as “constructivism,” touting their preference to play nice and work with management behind the scenes.

For years, activism has been changing. Companies have grown more accustomed to their approaches, and funds such as Cevian Capital, ValueAct and Trian Partners have paved the way for a less aggressive style.

Boards and management, in turn, have been eager to engage in order to avoid costly — and damaging — public battles.

“Generally, constructivism only works if you think management is willing to work with you,” said Patrick Gadson, the New York chair of Vinson & Elkins’ shareholder activism group. “If you think the company will be better managed by others, then you have no reason to be more constructive.

“It’s kind of like, if you really don’t want the driver of the car to drive, you’re only going to ask him or her to get out of the front seat for so long before you grab the wheel and throw them out,” he added.

Like Mr Loeb, other activist stalwarts such as Carl Icahn and Elliott Management still seem to relish a battle. Even funds like Nelson Peltz’s Trian Partners, which prefers to be known as an “active shareholder” rather than an activist, has turned more aggressive lately.

First, Trian launched a proxy battle to win Mr Peltz a board seat at Procter & Gamble last year. Then in late October, it took a stake in the paintmaker PPG and demanded that the company change its chief executive — the first time that Trian has taken such a confrontational step.

The fund decided that there was no time to lose to prevent what it saw as further damage to PPG and felt that in some of its previous campaigns it had been too patient, according to a person familiar with the fund’s strategy.

Mr Loeb’s Third Point fund, which manages $18bn, has always been one of the more unique players in activism because of its range of tactics and its mandate to switch strategies entirely depending on market conditions and on the nature of its target.

Third Point recently took stakes in two companies that it does not plan to mount campaigns against — PayPal and American Express. Mr Loeb, who is estimated to be worth about $2.9bn, gave both companies votes of confidence in their strategies in letters to his own investors.

In contrast, he has stepped up demands at Nestlé after feeling that change was happening too slowly at the Swiss food group, while staying short of going nuclear.

Mr Loeb, a health buff who named his hedge fund after a surf spot in southern California when he founded it 23 years ago and often retweets the Dalai Lama’s inspirational quotes, is one of the more colourful, and successful, activist investors. He has sued Sotheby’s, the auction house, helped to oust the boss of Yahoo and publicly targeted companies ranging from Dow Chemical to Sony.

At United Technologies, Mr Loeb took a stake in the first quarter of the year and called for a break-up into three standalone businesses. The company had already indicated it may split. But Third Point met management several times to discuss the strategy while the campaign stayed mostly behind closed doors.

Campbell Soup was in many ways a return to Mr Loeb’s old form, which made him notorious for criticising management with his poison pen. He repeatedly attacked the soup-maker’s performance, saying the board was responsible for a “tenure of mismanagement, waste, ill-conceived strategy and inept execution”.

The fight was always going to be an uphill battle for him, though — he was up against descendants of John T Dorrance, the inventor of Campbell’s tinned, condensed soup, who owned a 41 per cent stake.

When Mr Loeb launched the fight, the fund had hoped to win over some of those descendants and was caught off-guard when nearly all of them declared their intent to support management, according to a person familiar with his thinking.

After initially rejecting Campbell’s counter-offer of two independent directors as an alternative to his push to change the whole board, Mr Loeb backed down after the company agreed to give him input into a third director and its search for a new CEO.

“What you’re seeing in Campbell Soup is like the old saying for a litigator: if the facts are on your side, stick to the facts, if the law is on your side, stick to the law, if neither is on your side, bang the table as hard as you can,” said Lawrence Elbaum, co-head of Vinson’s shareholder activism group.

“I think Loeb got into a situation where . . . once he realised he was facing 41 per cent of the votes against him, he went to the dark side.”

Still, the recent boardroom victories for Third Point are yet to translate into positive returns. The fund was up slightly for the year until it hit the market turmoil of October, leaving it down 5.2 per cent for the first 11 months of the year.

Jason Caulfield, a partner in the financial advisory group at Deloitte in London, said that while some activists may “want to make a point that they can still be aggressive, their principal objective will still be to effect their demands to drive the greatest change in share price in the shortest time”.

For many, that means taking a friendlier tack if it is likely to work, he said, adding: “Hostile situations are more expensive.”

But Mr Elbaum, at Vinson & Elkins, said that despite the preference for friendlier activism, his firm is seeing an uptick in public battles.

“All of those companies that were low-hanging fruit, a lot of that undercarriage has been cleared,” he said. “So for the companies that remain where the activist really believes that there’s value to be unlocked and the board’s not seeing it, they’re going to have to go public and use the shame game.”

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