Activist hedge fund Taconic ups CA stake
Wringing out the cash
New York-based hedge fund Taconic Capital Advisors has upped its stake in systems software maker CA Technologies in an effort to convince the company to wring more profits from its books.
CA is in its quiet period ahead of reporting its financial results for the third quarter of fiscal 2012 ended in December, which happens on January 24, and so a CA spokesperson in investor relations told El Reg that "we aren't going to say anything about these guys."
Taconic was co-founded by financial heavy hitters Kenneth Brody and Frank Brosens in 1999 and currently has around $9bn in assets under management. Brody was a general partner at Goldman, Sachs & Co, where he worked for 20 years, and was named president and chairman of the Export-Import Bank of the United States during the Clinton administration; Brosens spent 15 years at GS as well and also became a general partner heading up risk arbitrage, stock options, and equity derivatives operations. Taconic is located on Park Avenue in New York and says very little else about itself.
According to the compilation of holdings put together by the NASDAQ stock exchange at the end of September last year, the company had increased its stake in CA by 47 per cent and CA was its largest holding at that point.
A Schedule 13D filing, which is required by the US Securities and Exchange Commission whenever an investor has 5 per cent of more of a publicly traded company's shares, says that Taconic has 25.35 million shares, for which it has paid $563.5m. That gives Taconic 5.14 per cent of CA's outstanding shares, clearly an amount that Taconic bought to trigger the SEC filing and to show that Taconic was leaning on CA to change its behavior. Taconic was just below the 5 per cent reporting requirement, but in the past two weeks has acquired 650,000 shares, putting it over the threshold.
These SEC reports are vague, but the filing Taconic says it bought the CA shares because "they are currently undervalued and thus represent an attractive investment opportunity." That doesn't sound so bad, but it is more complicated than that. Later in the filing, Taconic says that it believes CA should increase the amount of cash returned to shareholders (buyback shares or increase the dividend or both), implement a more efficient capital structure, and boost profits in its Enterprise Solutions business segment "to appropriate levels." Taconic has met CA's board and management and say they will continue to do so and may take their plans for tweaking CA directly to shareholders.
CA has done a bunch of acquisitions over the past several years and at the end of September 2011 (its second quarter of fiscal 2012) the company had $2.3bn in cash and equivalents and $1.3bn in debt. It's not like CA is exactly swimming in it, like Google or Microsoft. But CA is a roughly $5bn company, so relatively speaking, that's a fair amount of cash. And money that CA's managers probably want to save to do acquisitions. CA posted $2.36bn in sales in the prior six months, and brought $477m to the bottom line, which is 20 per cent of revenues. This seems perfectly reasonable for a software company of its size and scope. Very few software companies do better.
CA and its predecessor, Computer Associates, were always big on acquisitions, and the new CA has been hovering cloudy assets in recent years. Last June, CA spent $330m to buy Interactive TKO, an application development and lifecycle management tool supplier and in July it bought WatchMouse, which peddles monitoring tools for cloud, Web, and mobile applications. It bought Hyperformix, a server virtualization capacity management tool maker, in September 2010 for an undisclosed amount. CA also snapped up cloudy system monitoring tool provider Nimsoft in March 2010 for $350m, platform cloud provider 3Tera in February 2010 for an undisclosed amount, and network monitoring software maker NetQoS in September 2009 for $200m.
At current stock prices, CA has a market capitalization of $10.3bn and is probably not up for sale or a possible takeover target. ®
What is an activist hedge fund?
Activist hedge funds, or activist shareholders are trying to make lots of moolah, at lower risk than buying companies outright. The idea is to:
1. Find company that is 'badly run', and therefore has undervalued shares.
2. Buy lots of shares.
3 basically involves badgering the management to do stuff that gets the share value to go up. Sometimes this can be getting a company to spend its cash-pile on share buy-backs / dividends, bumping up the share value, plus divvie pay-out. Then you sell shares for profit.
Alternatively you might decide that the company has loss-making divisions it should sell off/close, or its prices are too low. So you badger management until they do something about it. Hopefully increasing profits, and therefore divvies / share price.
Sometimes they cause enough trouble, and persuade enough other shareholders that they're right, that they can get a seat on the board. Or even get a general shareholder vote to start sacking directors off the current board.
It's lower risk (and cheaper) than the venture capital thing of buying a company and turning it around then selling it. Plus you don't need to have someone who's good at the executive side of running things, you just have to analyse the situation correctly and persuade / force the company's executives to do your bidding.
I've read about cases where it's been successful, and whipped a lacklustre board into action. I'd imagine there's also plenty of failures, where the financial whiz kids have misunderstood what they saw in their spreadsheets for reality...
I expected a hedge fund managed by dreadlock sporting New Agers, literally living in a hedge and using their financial nous to fight fight against globalisation and corporate irresponsibility. I am sore disappointed.
Activist Hedge Fund
What is an Activist Hedge Fund?
See SAM (Southwest Asset Management in Santa Fe NM) and what they did to Sun Microsystems.