Tuesday 2016-08-23

Deep Value by Tobias Carlisle

This book walks through several histories of Activist Investors: T Boone Pickens, Carl Icahn, Ben Graham, Warren Buffett, and Ronald Brierley.

The thrust of the book is fairly represented by Carl Icahn's Manifesto -- which Icahn penned to his investors back in 1976 -- and runs as follows:

It is our opinion that the elements in today’s economic environment have combined in a unique way to create large profit-making opportunities with relatively little risk. [T]he real or liquidating value of many American companies has increased markedly in the last few years; however, interestingly, this has not at all been reflected in the market value of their common stocks. Thus, we are faced with a unique set of circumstances that, if dealt with correctly can lead to large profits, as follows: [T]he management of these asset-rich target companies generally own very little stock themselves and, therefore, usually have no interest in being acquired. They jealously guard their prerogatives by building ‘Chinese walls’ around their enterprises that hopefully will repel the invasion of domestic and foreign dollars. Although these ‘walls’ are penetrable, most domestic companies and almost all foreign companies are loath to launch an ‘unfriendly’ takeover attempt against a target company. However, whenever a fight for control is initiated, it generally leads to windfall profits for shareholders. Often the target company, if seriously threatened, will seek another, more friendly enterprise, generally known as a ‘white knight’ to make a higher bid, thereby starting a bidding war. Another gambit occasionally used by the target company is to attempt to purchase the acquirers’ stock or, if all else fails, the target may offer to liquidate.

It is our contention that sizeable profits can be earned by taking large positions in ‘undervalued’ stocks and then attempting to control the destinies of the companies in question by:

a) trying to convince management to liquidate or sell the company to a ‘white knight’; b) waging a proxy contest; c) making a tender offer and/or; d) selling back our position to the company.

-- The Icahn Manifesto

Ronald Alfred Brierley launched New Zealand Stocks and Shares—“The Leading Investment Journal,” as it described itself—in 1956 at the age of 19. He had decided to run a tiny classified advertisement selling the news- letter. If no one subscribed he’d abandon the project and be out of pocket only the cost of the advertisement. At the time the market capitalization of the entire New Zealand stock market was just NZ£300 million—about $12 billion in 2014 U.S. dollars—and the newspaper relegated financial news to a half page squashed between the golf and horse racing results, so he can’t have expected much of a response. To his delight, five checks for NZ£1 10s came in, for a grand total of NZ£7 10s (about $400), which was enough to produce the first edition.
-- Catch a Falling Knife
GNAs = Gone -- No Address, i.e. an uncontactable shareholder
Brierley was convinced that the industry would consolidate, and in the early 1970s took positions in a number of com- panies at what was the industry’s trough. The largest was Southern Farmers Cooperative Limited, which possessed two attributes Brierley sought. It had been a cooperative, but had converted to a limited liability company, and, in the process had uncovered 1,600 GNAs who had gone missing in the conversion. The formerly unusual legal structure meant that it flew under the investment radar, and the large number of GNAs meant that Brierley would not require 50 percent of the stock to control the company. Brierley estimated the intrinsic value of Southern Farmers’ shares, which traded in the market for $1.30, at almost $8 per share, making it at the time one of the most undervalued companies on the Australian stock market. He saw that Southern Farmers was so overcapitalized, and with so many fallow assets that could be sold, that he could get control of it for practically nothing once the capital was returned.

In 1974 Brierley put a third of Industrial Equity’s capital into Southern Farmers before the directors even realized he was preparing a bid. Believing Brierley wanted to strip the cash, the directors caused the company to return almost 7 percent of its capital to shareholders as a 50-cent-per-share cash dividend. As a substantial shareholder, Industrial Equity was one of the main beneficiaries of the return of capital, which just served to reduce its holding costs by almost 40 percent. Realizing their tactical error, Southern Farmers then merged with a consortium of agricultural companies, which had the effect of reducing the proportionate size of Brierley’s shareholding, but also delivered to him another large cash payment. Industrial Equity put the cash to good use, acquiring Noske Limited, a company that Southern Farmers wanted. In 1976, Southern Farmers bought Noske from Industrial Equity in an exchange of shares, boosting Industrial Equity’s holding in Southern Farmers again. Brierley was also appointed to the board of Southern Farmers, delivering him effective control of it. The company became his platform for consolidating the food and agricultural industry.

-- Catch a Falling Knife