Thursday, February 28, 2013

Looking at an Exemplary Manager’s IPO: Artisan Partners

Looking at an Exemplary Manager’s IPO: Artisan Partners

Artisan Partners, a very fine institutional money manager, has renewed its effort to go public.  I’ll leave it to potential investors to sort through Artisan’s complex financial structure and determine whether the offering is attractive or not.  Potential investors are being asked to weigh the future profits and cash flows of the company as they are apportioned by a series of share classes, subjected to a shareholder agreement, redirected by tax arrangements and winnowed down through distributions to existing investors.  Imagine a huge river with a series of diversions that siphon off water.  The question for new investors, who sit at the mouth of the river, is whether there will be enough water to quench their thirst.

Existing investors, including the founders, key employees, Hellman & Friedman, a private firm, and Sutter Hill Ventures, a venture capital firm, enjoy a variety of tax benefits, preferred payments, downside protections, and/or additional stock grants.  In short, their shares seem to enjoy a variety of preferences.
Early Days (2008)

I met with the management and a portfolio team at Artisan in Milwaukee on September 1, 2003.  I remember this date because I didn’t sleep the night before the meeting.  By chance, we had set up our due diligence session on the morning of Harley Davidson’s 100th anniversary celebration.  Throughout the wee hours of the morning swarms of motorbikes cruised beneath the window of my hotel room in downtown Milwaukee.   

After a restless night, I conducted a day of due diligence on Artisan’s midcap growth product.  At the time Artisan was a modestly sized firm of about $20 billion.  Today it has $74 billion in assets under management.  Among other folks, I met with Andrew Klein, the CEO, and the investment team of Andrew Stephens and James Hamel.  As the day progressed, I was impressed by their business model and investment philosophy and very certain that I should recommend that the North Carolina Retirement System retain Artisan.

Just after lunch with the investment team in Artisan’s conference room, Mr. Klein asked me to step into his office.  He had an embarrassed look on his face.  He told me that another institution had just made a sizable commitment to the mid cap growth product, and the portfolio managers could no longer accept any additional assets.  In other words, the highlight of my visit to Milwaukee had been the all night motorcycle parade.  There was no need to complete the remaining part of my due diligence inquiry.

I was surprised, to say the least.  But I wasn’t angry.  Artisan had done what a topnotch money manager should do.  They were disciplined enough to close a product when they thought they had as much money as they could effectively manage.  Moreover, they hadn’t applied undue pressure on my decision-making process by warning me that the product was about to reach its capacity.  All too often, money managers accept as much capital as investors are willing to throw at them, and pressure investors to sign up before it’s too late.  As far as I can tell from the prospectus, Artisan hasn’t veered from this path, and the same growth team is still managing money at the firm.

Their decision to hire Charles Daley as their CFO only reinforces my high regard for the firm.  I worked with Mr. Daley at Legg Mason.  I’d tried to hire Scott Satterwhite to manage small cap stocks for TradeStreet Investment Associates in 1995 or 1996.  Mr. Satterwhite, who was working at First Union, made the sensible decision to turn down my offer and went to work for Artisan in 1997.

As I think about the rigor of Artisan’s investment processes and business disciplines, I’m left to wonder if they’d be willing to accept the economics and governance structure detailed in their prospectus.  Clearly, the terms are good for them as existing owners and employees.  But would this be a good deal for their investors?  The investors will have to make that decision.

Artisan's latest prospectus can be found at:

Wednesday, February 27, 2013

A Misguided Attack on Corporate Activism

A Misguided Attack on Corporate Activism

Martin Lipton, a founding partner of the firm Wachtell, Lipton, Rosen & Katz, and
the inventor of the poison pill, launched a fierce attack on activist hedge funds in a memo to clients.[1]  Mr. Lipton is, undoubtedly, among the leading legal advisors on mergers and acquisitions.  His memo is one in a series of fusillades fired at hedge fund managers over the years.   As Andrew Ross Sorkin pointed out in Deal Book yesterday morning[2], this salvo is misguided.

Mr. Lipton uses the proxy battle being waged by David Einhorn, CIO of Greenlight Capital, with Apple as the prime example of the unwarranted and shortsighted attacks by hedge fund managers on corporations.  Mr. Lipton couldn’t have picked a more inappropriate example.  He asserts that Mr. Einhorn is trying to tell Apple how to run its business.  That’s decidedly not what Mr. Einhorn is trying to accomplish.  Rather, he’s attempting to get Apple to do something constructive with the $137 billion in cash on the company’s balance sheet.  Apple has amassed more cash than any company can invest productively, and Mr. Einhorn as an owner would like to see the cash returned to investors.  Moreover, as Mr. Sorkin points out, there’s nothing short-term about Mr. Einhorn’s ownership of Apple or his suggested strategy.

Meeting With KKR: Nothing to Report (2003)

In discussing his perspective with Mr. Sorkin, Mr. Lipton also sites the recent battle over Herbalife between William Ackerman, the CIO of Pershing Square Capital Management, and Carl Icahn as another example of shareholder democracy run amok.  Mr. Ackerman contends that Herbalife is a pyramid scheme and has taken a large short position in the stock.  Mr. Icahn has made a bet that Herbalife’s profits are real and sustainable.  While the debate between Ackerman and Icahn[3] is messy and vitriolic, it is what is investing is all about and how markets function.  Moreover, it has little to do with shareholder democracy.

Mr. Lipton is confusing shareholder democracy with short-termism. Short-termism is rapid-fire trading by institutional investors, characterized by holding periods that can be as short as a few milliseconds or as long as a few weeks.  Frankly, these types of investors don’t have much use for corporate governance or shareholder democracy.  I do agree, however, with Mr. Lipton that this short-term mentality is bad and counter-productive. 

However, giving institutional investors and money managers greater access to proxies and an easier road to electing alternative slates of directors is anything but a short-term strategy.  With highly competent lawyers like Mr. Lipton opposing every move, shareholder democracy is a cumbersome and expensive undertaking for any investor who has the gumption to attempt it.  I would like to see investors hold stocks for far longer and care much more deeply about voting proxies, evaluating executive compensation, and weighing the qualifications of board members.

I’m sure Mr. Lipton’s memo was well received by his corporate clients.  Unfortunately, the memo does little to advance the debate on either shareholder democracy or short-termism.

[1] Mr. Lipton posted the substance of his memo on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
[3] Dan Loeb, CIO of Third Point, LLC, also thinks Ackerman is wrong as has built a large long position in Herbalife

Tuesday, February 26, 2013

Raleigh News and Observer Follows Up On Quintiles

David Ranii of the Raleigh News and Observer expanded on a number of points contained in my recent post on Quintiles, which has filed to go public.  You can find Mr. Ranii's article at:News and Observer Follow Up On Quintiles References This Blog

How America Has Changed: Thoughts Before the Sequester Part I

How America Has Changed: Thoughts Before the Sequester Part I

In the fall of 1947, Europe faced a massive food emergency.  In the wake of World War II, European agricultural production had been destroyed.  Having sacrificed throughout the decade in order to support the war effort, Americans could have turned their back on the plight of Europeans.  However, President Harry S. Truman enlisted former President Herbert C. Hoover to lead an effort to address the crisis.[1]

President Truman called upon Americans to sacrifice.  He asked American farmers to stop feeding their grain to livestock so it would be available for export.  He called on restaurants and citizens to limit their intake of grain products.[2] Can you imagine an American president asking us to sacrifice for the good of our own country, let alone a foreign cause?  The last President to make such a plea to the American people was Jimmy Carter, and three decades after his speech, many Americans still mock his effort.

President Truman needed someone who understood this massive undertaking and the machinery of government.  He turned to President Hoover.  President Hoover had led the post-war reconstruction effort after World War I.  He possessed the expertise.  However, President Hoover had been vilified for fifteen years as the author of the Great Depression.  President Roosevelt had shunned the ex-President, and President Hoover was an opponent of the New Deal.  Any yet, President Truman reached out to the Republican ex-President to lead the effort to bring adequate food supplies to Europe.  A year later he called upon Hoover again to lead a study to reorganize the federal government.  Despite massive opposition from New Deal Democrats, President Truman supported President Hoover’s efforts, and eventually most of Hoover’s recommendations were carried out.   It was a major overhaul and consolidation of the Executive branch.  This kind of non-partisanship seems inconceivable in our era.

In America today, our politicians are incapable of non-partisanship on our most vital issues.  Moreover, the American people are perfectly content to impose sacrifice on someone else, especially the poor, but are unwilling to sacrifice themselves. 

[1] The relationship between the two Presidents is chronicled in “The Presidents Club: Inside the World's Most Exclusive Fraternity” by Nancy Gibbs, Michael Duffy and Bob Walter in chapters one and two.

Founders to the Rescue: Barnes and Noble, Best Buy, and Dell

Founders to the Rescue: Barnes and Noble, Best Buy, and Dell

With Leonard Riggio’s announcement that he’s interested in buying the retail and online businesses of Barnes and Noble, three companies are now weighing bids from their founders/chairmen.   For the better part of six months, Richard Schulze, former chairman of Best Buy has been trying to pull together the financing to acquire the company.  And of course, Michael Dell, founder and chairman of Dell Inc. has put forth a proposal along with Silver Lake to take the company private.

The stocks of all three companies are selling at a fraction of their all-time high price due, in large measure, to fundamental challenges facing each of the businesses and their respective industries.  Each of these founders appears willing to put a substantial part of his net worth, as well as his reputation at risk, in order to reverse the downward course of the companies.  In all three instances, independent committees of the board will try to tread a narrow path between the chairman/founder’s inside knowledge and the skepticism of institutional investors.   Special Committees spend a lot of time with lawyers, bankers and each other trying to sort through the myriad of issues and conflicts.

Music Matters (2009)

For all the similarities, these three deals are in very different places.  Michael Dell appears to have had the equity and debt financing to carry out his proposed buyout when he approached Dell’s board a couple of weeks ago.  At age 48, Mr. Dell is also at a stage in his life where managing a challenged, as well as leveraged business, seems like a reasonable undertaking.

Mr. Schulze, 72, was ousted as chairman last year after failing to report his knowledge of an affair by the then-CEO Brian Dunn and an employee.  A few months later, Mr. Schulze approached the board about buying the company.  However, he had not lined up the financing, and has had to ask the board for a couple of extensions in order to try to piece together a deal.  Even if he puts together the equity and debt, Mr. Schulze will have to take a very active role in order to try to reverse the fortunes of Best Buy.

In recent days, Mr. Riggio[1], 71, approached the Barnes and Noble board to propose a buyout.  However, he did not indicate a price or a means for financing the deal.  In fact there are real questions about the value of the retail and online operations of BNS.  Until very recently, it appeared that the electronic book division, manufacturer of the Nook, might be worth as much as the entire company.  However, holiday sales for the Nook were disappointing, so it’s become unclear what the electronic business is now worth, and therefore what Mr. Riggio might have to pay for the rest of the company.  In any event, the check that Mr. Riggio might write to acquire the business is tiny (measured in the hundreds of millions) compared to the amount of money Mr. Schulze and Mr. Dell have to come up with.         

On the one hand, I give the three founders credit for attempting to reverse the fortunes of their respective companies.  On the other hand, the computer, electronic retail, and book selling businesses are littered with bankruptcies and out right liquidations.  Investors are left to wonder if Messrs. Dell, Schulze, or Riggio are acting with through their hearts or their minds.

[1] Technically Mr. Riggio is not the founder of Barnes and Noble.  He acquired the company in 1971, and built out the big box chain from a single retail store on 5th avenue.