CFO to Hedge-Fund Activist: F–k You!

Despite management animosity toward them, some fund firebrands can develop a fondness for finance chiefs.
David KatzJune 1, 2007

Editor’s note: For more on hedge-fund activists, see CFO magazine’s June 2007 feature, “Hedge-Fund Bullies.”

Welcome to the world of Robert Chapman, a hedge-fund activist known for his killer instinct and way with words. In one case last year, he bought up 7 percent of Vitesse Semiconductor’s shares and accused the board of “treating backdated stock options tied to the success of Vitesse’s computer chips like past-expiration bags of stale potato chips.” He also demanded that the company oust its CFO and put itself up for auction.

In another instance, he swept into Embarcadero Technologies this year and delivered an ultimatum: if the company failed to put itself up for sale, Chapman Capital would publicly reveal the results of its own probe of the board and executive team.

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Chapman’s in-your-face aggressiveness can set management’s teeth on edge. At Embarcadero he goaded the company’s finance chief, Michael Shahbazian, into using the ripest of expletives, which subsequently made a rare appearance in a Securities and Exchange Commission filing.

The activist told the CFO that Chapman Capital background checks had revealed that the shareholders of three companies where Shahbazian had served as finance chief had negative views of him. In an SEC filing, Chapman reported that “Mr. Shahbazian reacted temperamentally to Mr. Chapman with the eloquent response, ‘F–k you!’” (An Embarcadero spokesperson said the company wouldn’t comment on the situation. Vitesse didn’t respond to a request for comment.)

Such dramas are far from unusual. Each day seems to sprout new moves by star activists to rattle companies to their core. Short of outright sales of companies, the fund managers’ toughest demands range from whopping share buybacks to CEO firings to high-profile spin-offs. Late last year, for example, Kerr-McGee Corp. agreed to buy back $4 billion of stock to help end a proxy fight with Carl Icahn — who has morphed in recent years from corporate raider to hedge-fund activist icon — and Barry Rosenstein’s JANA Partners, another well-known militant fund.

In 2005 William Ackman, managing partner at Pershing Square Capital Management, called for McDonald’s to spin off 65 percent of its 8,000 company-owned restaurants and borrow $14.7 billion against its real estate. At beleaguered Ceridian Corp., Ackman has waged a proxy fight, filed a lawsuit against the company, and sought a spin-off of its successful Comdata subsidiary. Indeed, Ackman’s moves seem in no small part to have led to the ultimate shareholder coup: on Thursday the company announced it would be sold to Thomas H. Lee Partners and Fidelity National Financial for about $5.3 billion.

There’s no question that the current tidal wave of activism contains serious worries for top management, particularly at underperforming or cash-heavy companies. Even in their conciliatory moments, fund managers can sound harsh on such issues as executive compensation. Asked by if managements should fear activists, Chapman replied: “Corporate managers should not fear, but instead show respect for, all owners of companies as a result of the fact that these owners are paying the executives’ salaries, bonuses, and perks and are being diluted by the free stock-option grants that are nothing short of lottery tickets for their recipients.”

Menacing as the new activism may seem to management, however, a more complex picture of the phenomenon has begun to emerge. Contrary to the common portrayal of activists as short-term plunderers out for a quick buck, new research shows that they tend to hold on to their shares for a relatively long time. While some activists do harbor takeover dreams, most prefer to stay on as gadflies and keep their hands off management, experts say. And many funds only become activists after a stint as passive stockholders.

Another unexpected feature of some hedge-fund activists is that —contrary to Chapman’s set-to with Shahbazian — they have a soft spot for certain CFOs. Ceridian’s announcement in March that Douglas Neve, its finance chief since 2005, would be stepping down drew harsh words from Ackman. “The announcement of [Neve’s] departure is a real disappointment,” he said in a press release, describing Neve as a “first-class CFO.”

Ackman noted that Neve had been widely credited with restaffing and rebuilding Ceridian’s finance operations and with restoring investor confidence in the face of a lengthy SEC probe of the company, five restatements, and a bevy of alleged accounting violations. The ex-CFO had been critical of management and the board — a fact that no doubt contributed to the activist’s warm feelings for the finance chief.

To be sure, a hedge-fund mogul and an ex-CFO might seem odd bedfellows to those who see aggressive hedge funds as an automatic threat to entrenched senior management. Despite their frequent attacks on CEOs, however, the managers of the lightly regulated pools of capital often display high regard for the finance function.

In fact, hedge-fund-generated corporate shakeups might even provide job openings for a finance chief. Last year, after Pirate Capital had gobbled up a 7.9 percent stake in James River Coal Co., for example, the activist fund slammed the mining company’s share price, its failure to meet consensus earnings estimates, and its lack of a coherent operational and financial strategy. The reasons for all these problems? The CEO’s lack of experience and “the Company’s lack of a CFO,” Pirate asserted. The hedge fund has since seen its wish fulfilled, and James River now has a finance chief, Samuel M. Hopkins II.