Activist shareholder campaigns often don't deliver results

Four years ago this week, one of the most high-profile activist shareholder campaigns against a local company wrapped up at Regis Corp., and it wasn't even close. Three nominees of the activist shareholder, the prominent hedge fund Starboard Value LP, were swept onto the board.

Maybe they then contributed a lot to the board, but this campaign wasn't about that; it was about boosting shareholder returns. With Regis shares last week trading at around $12.60 per share, they were off more than 20 percent from the closing price the day before the results of the ­October 2011 shareholder vote were announced.

Starboard Value, the hedge fund behind the campaign, is long gone as a principal investor in Regis.

That kind of inconclusive outcome after "winning" a hard-fought activist campaign seems to make the whole exercise kind of pointless, but it's far from rare, and one good reason to greet news of any new campaign with skepticism.

These efforts by investors to get companies to change are now so common that last year public campaigns targeted more than 250 American companies, according to a review by Activist Insight. The effect they have over the long term has also increasingly been studied, including when the Wall Street Journal recently looked closely at the outcome of 71 campaigns.

Activists can, in fact, spark changes that lead to improved shareholder returns, the Journal found. But nearly as often, all an activist really accomplishes is making sure a lot of energy gets turned into nothing more than smoke and noise.

In recent conversations with investors who push companies for changes, it appears that many even dislike the term activist. They insist that all they're really doing is making sure a public company is run for the benefit of its owners.

They look for opportunities in any industry, but it's common for retailing companies like Regis, an operator of hair salons, to attract them. One thing that makes retailers and restaurant operators popular targets is that they usually control a lot of real estate. Maybe some of that real estate would be worth a lot more to somebody else, freeing up capital.

Another strategy pushed by activists is called re-franchising, which means selling off the stores owned by the company to franchisees. Once again capital can be freed up, and then maybe used to buy back shares in the open market or pay dividends.

My own suspicion is the hedge fund managers look at underperforming retailers and restaurants and think they can't be that hard to fix. Finding the processes to improve in a high-tech manufacturing facility takes genuine expertise, while any recent business school grad can tell when the pasta is overcooked.

Whatever the reason, a sort of activist shareholder cottage industry has sprung up around the Minnetonka-based restaurant company Famous Dave's of America. And it's generous to the activists to say that the results so far have been mixed.

It's not even easy to say for sure how many of these investors have recently tried to influence how Famous Dave's is being run. A reasonable count is five.

They are now more or less in charge of Dave's. Wexford Capital LP co-counder Joseph Jacobs is now chairman of its board of directors and altogether about 45 percent of the shares now appear to be represented on the board.

What was most ­noteworthy about the recent earnings results delivered by these activists wasn't the reported earnings-per-share or 9 percent decline in comparable store sales at corporate-owned restaurants, but rather the text of the earnings release itself.

The theme of the commentary was that the interim CEO first had to undo everything the last CEO did. That included reversing "smaller portions, different plateware, and changes to iconic items such as cornbread muffins and other poor decisions."

This wasn't the typically measured language of corporate communications. At a glance, it was easy to figure out an explanation.

Interim CEO Adam Wright isn't a corporate executive, not really anyway. He's a principal of the Minneapolis-based hedge fund Blue Clay Capital Management and one of the activists.

On the conference call that day with investors, he still sounded like he was leading an activist campaign. It was a little like hearing a revolutionary rail against an unjust dictator, while seated behind the dictator's desk in the palace and long after the shooting has stopped.

The CEO he blamed for the iconic muffin blunder was former McDonald's senior executive Edward Rensi, who in June became the company's third ex-CEO in three years. What was interesting is that Rensi had been recruited to the role in early 2014 by other hedge fund managers, including Jonathan Lennon of a firm called Pleasant Lake Partners.

Lennon, still just in his early 30s, is one of the investors who's joined the company's board. He runs a so-called "concentrated equity" investment fund, a kind of investment management take on the timeless strategy of putting all your eggs in one basket.

Before starting his firm, Lennon had been an analyst at another hedge fund and once worked in the investment banking group of Goldman Sachs, too.

This is just a brief biographical sketch, of course. Any other investor researching the company, though, would have to conclude that the one thing that seems to qualify Lennon to take up important tasks like recruiting CEOs is that his fund owns about 13 percent of Famous Dave's common stock.

The stock's value has declined about 55 percent so far this year.

Famous Dave's actually now appears to be the kind of company that seems ripe for an activist shareholder to jump into, demanding change and demanding it now. But yet another activist arriving on the scene at Famous Dave's has to be about the last thing the company needs.

lee.schafer@startribune.com • 612-673-4302