A independent out to maximize shareholder value where management is disfunctional.....with a plan to do something about it.
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Tuesday July 9, 12:36 pm Eastern Time
Reuters Company News
Investor Profile: Denton likes to take on a good fight
By Tom Johnson
NEW YORK, July 9 (Reuters) - If there's one thing that sets Herbert Denton apart from most other portfolio managers, it's that he loves to pick a good fight.
A value-oriented investor who earned his spurs taking on companies from Moscow to Hong Kong, Denton has for the last six years used a tiny pilot fund as leverage to push for changes at underperforming U.S. companies -- from tiny micro-caps to health care giant Aetna Inc. (NYSE:AET - News).
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Now, Denton, the president and co-founder of Providence Capital Inc., aims to raise $350 million by the end of this summer. He plans to use the money, year by year, to take positions in more than a dozen companies he believes are trading at deep discounts to their net appraised worth, or intrinsic value.
Denton's interest in his target companies goes beyond looking for bargain stocks, however. He uses his positions to wage public battles for changes many other portfolio managers can't or simply won't touch.
"Firms like Legg Mason, Brandes (Investment Partners) and Harris (Associates) typically are not going to want to take a lead position in enforcing their influence," Denton said. "So we discovered there is a role for an independent party that does not kowtow to corporate America."
PUSHING FOR CHANGE
Few would ever accuse Denton of kowtowing, although several corporate executives could probably come up with a few other choice words.
Using an investment style honed in Asia while seeking out undervalued companies for Donaldson, Lufkin & Jenrette 25 years ago, Denton looks for opportunities where he can provide returns "independent of the market" for investors in his $10 million private investment fund.
"In the early 1980s, somebody said to me, 'Yeah, value stocks. So what? So a stock's cheap. So what?' That struck me as an uninformed comment, but it kept rattling around in my brain. So we've spent the last 17 years answering the question," Denton said.
That's what sets him apart from most value managers, who typically search for companies with low price-to-earnings ratios and strong fundamentals. Denton is seeking the same qualities, but will actively push for changes he believes are needed to influence a turnaround.
"The big firms are usually quiet publicly but can be influential behind closed doors," said Russel Kinnel, director of fund analysis at research firm Morningstar Inc. "Still, most value investors have to decide whether it's worth their time to spend 80 hours fighting a battle, particularly if they have a small stake in a company. That's where these guys (like Denton) can be helpful."
Denton spent 17 years honing his strategy abroad and in New York, where he now operates Providence Capital out of a modest, newly renovated office near Central Park in Manhattan.
Along the way, he was aided by a power shift from corporate America's so-called "imperial CEO" to a cadre of investment companies that almost overnight had amassed sizable stakes in most of the companies in the Standard & Poor's 500 index. He now counts managers from many of those investment firms among his friends and partners.
HIGH SUCCESS RATE
Unlike managers who try to take advantage of a temporary drop in any given stock, Denton's team looks for long-term problems -- a sign, he says, that the firm's strategic direction no longer works.
Then he pounces, typically buying a small stake and thumbing through a Rolodex that includes some of the world's most famous value investors -- like Bill Miller, the famed manager of Legg Mason's Value Trust fund -- to legendary corporate antagonists like Carl Icahn.
Because many fund managers are prohibited from actively campaigning for changes in management or corporate governance, Denton does it for them. He typically starts by writing to the company's CEO, stating matter-of-factly that, unless certain changes are made, he's prepared to nominate one or more candidates to run for seats on the company's board.
In the six years he has run the pilot fund at Providence Capital, that strategy rarely has changed. His returns also have outperformed the broader market recently. Last year, his fund returned 29.7 percent. So far this year, he's up only 1 percent, but that's still a lot better than the deep declines recorded by major market gauges.
This year, Denton launched campaigns at seven companies to remove so-called "poison pills," or bylaws designed to make unwanted takeovers prohibitively expensive. Four companies removed the pill rather than face a fight for their board seats and two made it more shareholder friendly.
Only one company, Aetna, successfully fought off Denton's campaign. Aetna, in essence, called Denton's bluff and defeated his board nominee, who lost in a landslide.
"Aetna had already made significant progress in our turnaround efforts, so this clearly was not the time to disrupt the progress we were making on our own," said Roy Clason, an Aetna spokesman.
Still, Denton says that Aetna has "promised to think about" changing its poison pill provision.
IN SEARCH OF INVESTORS
Now, Denton is looking to give his strategy a boost. By mid-July, he will have put together a list of 200 potential investors able to sink $25 million into his fund. By the fall, he hopes to entice 14 of them to invest with him, giving him the ability to take on six to eight companies a year.
While the bulk of his portfolio will be made up of stocks in which he believes he can campaign for effective changes, he will trade around his core positions. In a bear market environment, "you've got to be very nimble," he noted.
Thus, when the share price of troubled conglomerate Tyco International Ltd. (NYSE:TYC - News) hit $11.47 a couple of weeks ago -- down about 80 percent from the beginning of the year -- he started buying. |
