Jeff Smith's Value Investing Congress Presentation: 4 Case Studies ~ market folly

Wednesday, September 10, 2014

Jeff Smith's Value Investing Congress Presentation: 4 Case Studies

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is Jeff Smith of Starboard Value who presented four case studies.

Jeff Smith's Value Investing Congress Presentation

Starboard Value:  80% "success" rate across its history; research shows 26.4% average (median?) returns vs. 9.7% market from when 13-D is filed.  Has placed over 100 people on various boards over 10 years.  18-24 month hold

Selection criteria to get involved:
(1) Plan to unlock value
(2) Clear path to execute (either cooperative management or ability win proxy)
(3) Company is undervalued on absolute basis 

Case study: Tessera 

Good IP licensing business for semi-conductors, good margin, some reinvestment in R&D needed
Tried licensing cell phone camera focus IP but failed bc the buyers did not want to buy without seeing it work in real life
So they build a test case but that wasn't enough
So they double-down and try to find someone to mass-produce their IP, and fail
So they double-down again, and bought a facility for $500 mm and started losing $150 mm per year 

Starboard comes with a plan to refocus the company, dump the camera business and do an overall cost reduction

Replaced the majority of the board, new CEO, sold non-core assets, reduced headcount

Interestingly, the board chairman who led the defense stayed on, and is now friendly with Starboard and can serve on other boards for them in campaigns 

Case study: Office Depot (ODP) 

Second largest office supply company; declining sales, growing overhead, lowest margins in the industry

Starboard plan: cut expenses, reduce SKUs, rationalize distribution, sell Mexico JV, change customer mix (biz vs. retail), merge with Office Max

ODP so far: new superstar CEO, new CFO, merger with OMX, sold JV, 3 new board members.

Case study: Darden 

(On-going situation which appears to have limited the details he put out: ie he did not discuss Red Lobster sale in his deck)

World's largest full service restaurant. Also a big real estate owner unlike it's peers which is an inefficient use of capital. Company runs several brands, two legacy Olive Garden and Longhorn, and smaller growth names. 

Opportunity: real estate value, operational underperformance (even worse when adjusted for non-payment of rent)

Current plan: running a board slate, implement performance plan, separate mature vs. newer concepts, explore franchising 

Case study: MWV 

Packaging conglomerate (various uses); non-core specialty chemicals and real estate businesses; run by the same family for many years (but with low current ownership %)

Very weak operating performance: both gross margins and SG&A spend are substantially worse vs. industry comps

Starboard plan: sell/spin non-core assets, reduce overhead, increase margins to comp, use of pension overfunded status in a merger  

Q&A: Good board memebers: independed, successful people who don't accept mediocrity, secure in who they are, don't "need" the board seat for income, true representatives of the shareholders, "statesmen", be willing to dissent, be willing to criticize CEO based on own industry experience

Q&A: Wilcox update: nothing to share  QnA: WPP update: has been a struggle, replaced CEO

Q&A: MWV transaction leakage: yes, a lot of tax planning will be involved; the overfunding can be used to merge with an underfunded industry competitor and receive some of the value there; reverse morris trusts or other structures in play

Be sure to check out the rest of the Value Investing Congress presentations here.

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