ARTICLE MENTINING MR. PINK FROM THE DAILY DEAL.
WHO IS THIS LOEB IMPOSTOR?
Pressure play
by Stephen Taub
Updated 07:01 PM EST, Jan-23-2003
Daniel S. Loeb
Daniel S. Loeb of Third Point Management admits he was excited when he learned last spring that legendary corporate raider T. Boone Pickens was a fellow investor in Penn Virginia Corp. and, like Loeb, noisily pushing management to boost its stock price.
"It didn't go unnoticed that Mr. Pickens' name and Third Point's were mentioned in the same sentence in activist activities," adds the New York hedge fund manager.
You see, when the impressionable Loeb embarked on his Wall Street career back in the mid-1980s after graduating from Columbia University with an economics degree, it was during the giddy excitement of merger mania, hostile takeovers and leveraged buyouts financed in large part by junk bonds underwritten by Michael Milken and Drexel Burnham Lambert.
"I'd be lying to say I didn't look up to guys like Carl Icahn, T. Boone Pickens, the Coniston Partners, Irwin Jacobs — people like that — as corporate heroes," Loeb admits. "I was in my early 20s, and these guys were coining serious money by buying positions in undervalued companies and taking on entrenched management head-on."
Inspired in large part by their success, Loeb has become a new age corporate activist himself. But, with just more than $500 million in his 8-year-old firm — he currently runs a domestic hedge fund and offshore fund — Loeb does not yet enjoy the widespread Wall Street or media notoriety that his 1980s idols enjoyed. But he sure is trying.
"There aren't the same opportunities today," Loeb concedes. "Companies are not as undervalued. Management is not as bad as they were then, except for companies like Penn Virginia and [a few] others."
The 41-year-old Santa Monica, Calif., native retains a steadfastly youthful streak, avidly surfing at Montauk, Long Island, even in winter. Indeed, his firm's name, Third Point, comes from a surf break in Malibu he knew as a youth. But Loeb likes a fight, and his dark brown hair has turned mostly gray "due mostly to my activist activities," he explains. Indeed, in 1998 he was named in The Wall Street Journal and, later, in a lawsuit, as possibly being "Mr. Pink," a pseudonymous hedge fund manager who posted derogatory comments about companies on an Internet bulletin board. Mr. Pink once gave the home address and phone number of a broker who had touted a stock, telling disappointed shareholders to call the broker at home or "send him a gift."
Loeb won't say if he was Mr. Pink. The suit, filed by a company maligned by Mr. Pink, was later dropped.
Penn Virginia is the latest firm to find itself in Loeb's crosshairs. Loeb is currently the largest investor — with a stake of just less than 10% — in the Radnor, Pa.-based oil and gas company. Loeb is seeking a spot on the board and recently fired off an accusatory letter to CEO A. James Dearlove questioning both the selection of a new board member and the qualifications of a member of the nominating committee.
In August 2002, Pickens himself backed off from his own attempt to buy Penn Virginia. However, in a letter to Penn Virginia executives, he urged the company to drop its poison pill. "I have tremendous respect for Mr. Pickens, and I'm not about to second-guess his investment decisions," Loeb quickly stresses.
Still, it's not lost on observers that Loeb seems inclined to push on with his campaign to boost shareholder value, just as Pickens would have during an earlier era.
"I'm like a guy with a 10th-degree black belt in karate who is not willing to get into a fight," says Loeb, who started his career at Warburg Pincus, where he spent three years in its venture capital operation before moving onto arbitrage specialist Lafer Equity Investors.
"I don't look for the proverbial corporate battles," Loeb says. "But if push comes to shove, I am prepared to use talents developed over the years. I'm not scared."
Just ask Dearlove or the folks at Agribrands International Inc., Stage Stores, Insignia Financial Group and BindView Development Corp., companies where Loeb has sought to sway the outcome of a merger or recapitalization, change management's compensation and perks or alter the company's corporate governance practices.
For example, in 2000, he fought hard to prevent Ralcorp Holdings from buying Agribrands International, in part because the same person — William Stiritz — was the chairman of both companies, which were both spinoffs of Ralston Purina. Later that year, Agribrands agreed to be bought by closely held Cargill Inc.
In a letter to Stiritz on Sept. 8, 2000, Loeb wrote, in part, "The transaction raises further concerns about your exercise of fiduciary duty; this is not the first time that you have apparently put your personal interests above those of the shareholders whom you serve."
Stage Stores, a Houston-based department store chain that had filed bankruptcy for the second time, was a different type of investment. Loeb initially bought the company's 8.50% senior notes on the cheap during the summer of 2001 while the company was in Chapter 11 and eventually wound up with 6.2% of the equity, mostly from exchanging the notes for stock.
Since he asked the company to pay more heed to corporate governance issues and shareholder value, Loeb credits it with, among other things, launching an aggressive stock buyback program. "They have done a terrific job," he stresses. Loeb is now totally out of the stock after making two to three times his average investment in a little less than a year.
These days, the largest investor in State Stores, with more than 10% of the shares, is another activist hedge fund, Greenlight Capital.
Another project is Insignia, a real estate firm. In April 2001, when Loeb initially filed his 13D on the company after taking a little more than a 5% stake, he said he planned to make suggestions relating to selling parts or all of the company, changing the company's strategy, the adoption of antitakeover devices and restructuring the company's capitalization or dividend policy.
Since then, Loeb takes credit for getting the company to stop providing a personal jet to the CEO and changing management compensation related to its interest in limited partnerships. "This issue was raised on conference calls and calls to board members," Loeb explains.
On Dec. 27, Insignia announced corporate governance changes, including new "limitations on … political and charitable contributions" and revised expense procedures.
Still, the stock has fallen from the low teens when Loeb bought his shares to a recent $7.44. And, in the third quarter, Loeb sold more than 1 million shares, cutting his stake to 4.35%. Now he is pressing the company to "rationalize costs" and sell to a third party in a competitive auction. He opposes a management-led leveraged buyout for a "low-ball price that has been rumored."
In the meantime, Loeb has activist company: In early December, Icahn took a 6.9% position in Insignia. Other smart money types that rank among the largest investors include Leon Black's Apollo Advisors, as well as hedge funds Greenlight Capital, Eminence Capital and Ivory Investment Management.
Has the company responded to Loeb's complaints? It's hard to verify his impact independently in most of these cases because these companies have little analyst coverage and the other institutional investors are mainly hedge funds.
"I can't guarantee causality," Loeb says of the impact of his complaints to Insignia. "The board listened to our preliminary complaints and addressed the most glaring failures of fiduciary responsibility. I hope they won't stop probing at [CEO Andrew] Farkas' abuse of personal expenses charged to the company."
David Einhorn of Greenlight Capital — which also owns a piece of Stage Stores — call's Loeb "a really smart guy who can be a value-added investor." And, in the case of Insignia, "he expressed specific criticism," Einhorn says, "[and] the company clearly acted to mitigate some of those concerns."
Insignia declined to comment.
BindView, a computer network software maker, is a different situation. Loeb initially sought a change in management and the board when he filed a 13D about 1-1/2 years ago. Sure enough, in July 2001 Eric Pulaski, BindView's chairman and founder, replaced Rick Gardner as CEO. He also credits new chief financial officer Edward Pierce for cutting costs.
But the overall software market has crumbled. So, Loeb now recommends, "They should put on a full-court press to sell the company."
All of these positions were the outgrowth of his investment process. Loeb is most comfortable investing in companies whose market capitalization ranges from $300 million to $1 billion, or as he says, "companies where we are comfortable we can own between 5% and 10%" of the total outstanding shares.
He then searches for undervalued securities. In fact, he decided to get in the face of management of Agribrands and Insignia after he owned the stock.
Still, Loeb admits he intentionally took a stake in BindView "with the specific goal to effect some change."
Same with his investment in Penn Virginia. "I went in with a specific understanding of management's limitations before I made my investment," he adds.
Even so, activism is a small part of what he is all about. Loeb estimates that 90% of his portfolio consists of passive investments in companies whose management he thinks is doing a very good job.
"I'm looking to make uncorrelated investments in value-oriented securities and hedge my exposure to the market by selling securities short," Loeb explains. "I want to be profitable independent of market conditions."
For the most part, he has met his goal. Third Point has compounded annually at 26%, net of his 1% management fee and 20% performance fee. In 2000 and 2001 when the major market averages crumbled, Loeb was up 17% and 15% respectively. However, he was down about 7% in 2002. Still, that's not bad given that the S&P fell three times as much and the Nasdaq four times as much.
Loeb owns about 30 stocks. But, he says that outside of the ones where he has already filed 13Ds — Penn Virginia, Insignia and Bindview — none of them are candidates for activism. "I'm pleased with management of all of them," he assures. "I'm happily sitting on the sidelines letting them do their work. I look at them as undervalued situations."
His favorite stocks include Dade Behring Inc., a clinical diagnostic company; Rotech Healthcare Inc., which provides equipment and services to patients with breathing disorders; Washington Group, an engineering, construction and environmental company; and Warnaco, an apparel company. All of these companies have completed a reorganization, except for Warnaco, which is expected to emerge from bankruptcy early this year.
Back at Penn Virginia, there's little evidence that Loeb is getting his way. On Jan. 8, the company again rebuffed Loeb's bid for a seat on the board, electing Gary K. Wright, a former Chase Manhattan banker and one-time Chevron Oil Co. petroleum engineer.
Loeb thinks the stock is worth more than $50. He argues it has an undervalued asset base, the current macro economic environment for natural gas and energy companies is "excellent," and it has an undervalued asset in its Penn Virginia Resources subsidiary.
"We've talked to many [potential buyers]," Loeb assures. "I have no doubt that a niche gas company or bigger oil and gas and coal companies have looked at the company and are interested in buying it."
And you know that Loeb won't go away until a deal is reached. |
