Like many, I wasn’t a fan of hostile takeovers back when they were all the rage in the 1980s. I had the pleasure of knowing some outstanding CEOs and well-run companies that were operating as their original investors had envisioned: steady growth, solid and consistent earnings. But times had changed—or rather, their investors had changed, from individuals to primarily institutional investors. Targets included companies such as Universal Foods and RTE Corp. in Milwaukee. And closer to home there was Northwest Airlines.
Steve Rothmeier had done a great job combining Northwest Orient with Republic Airlines to create Northwest Airlines, and as its CEO, he ran it with a strong balance sheet and safety record while other airlines were having problems. He added Detroit as a hub, expanded its routes and set up the first major contract by a U.S. airline to buy the then-new Airbus jets (and in so doing, received a substantial discount on the price at which Airbus would later sell the same model).
A former Northwest board member, Gary Wilson, teamed up with financier Al Checchi in 1989 to launch a hostile takeover (or, more nicely termed, leveraged buyout) because he realized Northwest was sitting on land in Japan worth hundreds of millions of dollars. Rothmeier’s Airbus jet order also was worth hundreds of millions of dollars: Checchi and Wilson later cancelled delivery and sold the contract to aircraft financing firms for a profit. The rest is history; the debt and the way they managed the airline eventually forced it to file for protection from creditors in 2005 before it eventually merged with Delta in 2008. The Twin Cities went from having more than 16,000 airline employees to a few thousand.
Through the 1980s, shareholders transitioned to more large institutional types who cared first and foremost about making a great return on their investments. Things became overly skewed in favor of the investor constituent—damn the employees, the community, the customers and the long-term viability of the company that was making such profits for them.
Enough people raised concerns for regulators and the courts to take action, sending the pendulum all the way to the other side in the 1990s, easing rules and supporting court cases giving existing boards of directors what now seems like unabated freedom to enact poison-pill and other types of anti-takeover provisions, as well as the will to fight off any proxy challenge that comes their way.
Today, I wonder if it isn’t time for the pendulum to swing back, at least toward the middle, as we’re seeing instances where shareholders, as well as all other constituents, could be better served than by how their entrenched boards are serving them.
Target is a prime example. In 2007 shareholder activist William Ackman purchased $2 billion worth of Target’s stock and proposed ways for Target to unlock certain assets to both increase shareholder value and help the company focus more on remaining a great overall company. To most, this seemed like an attempt to leverage or sell off Target’s assets to free up billions in cash, use it to increase its share price, then sell his stock and leave the company weaker in the long term.
Among the most detested ideas was his proposal for Target to sell and lease back its property through a real estate investment trust. Some of his other suggestions were later followed, such as Target selling off its credit card receivables and funding a $10 billion stock repurchase plan. But lost in all of this was Ackman’s challenge that Target’s board of directors should be changed.
It remained the same—and we saw what happened as a result. While Target’s CEO changed a little less than a year ago, the board remains primarily the same. As a result, it’s highly likely Target’s results will continue to be lackluster, and we’ll once again see someone like Ackman challenge its governance.
One reason is that activist investor campaigns against public companies are on the upswing. As TCB senior writer Burl Gilyard notes in “Imation In The Crosshairs”, such activity through the end of March was up 37 percent compared with a year earlier. There were 348 campaigns last year, compared with 219 in 2010.
And such investors are more frequently looking at companies in Minnesota. As Gilyard details, New York investor the Clinton Group has recently set its sights on Imation after successfully forcing change at Value Vision/ShopHQ (recently renamed EVINE Live) last year. I talked with Imation CEO Mark Lucas three years ago about his goal. (Disclaimer: Afterward, I thought so highly of his plans that I bought a few shares of stock in the company.) Things didn’t go as well as Lucas had hoped: Since he took the helm, the stock has gone from around $12 a share to around $4. This month marks his fifth year on the job, and perhaps it is appropriate that shareholders consider whether it’s time he steps down.
To Lucas’ credit, he inherited a dog with fleas. Imation was spun off from 3M in 1996 to try to sell data storage, photo products, document systems and other goods that would soon become obsolete. At the time it had $2.2 billion in sales but was losing $180 million a year. Last year, it reported sales of $730 million and a loss of $115 million.
Lucas has tried on several fronts. And during the last six months, two new members joined Imation’s board; four are new within the last three years.
But the company also has cut its corporate staff by more than 50 percent in the last two years. The question now is who will have the better potential growth strategy for something that, nearly 20 years later, is still a flop? Even if activist investors say they do, will their pick as interim leader—tech veteran Robert Fernander—do better than Lucas?
The majority of Minnesota’s businesses don’t need to be challenged by outsiders such as the Clinton Group. But for those that do, more activity on this front can only help, as it will make their boards more accountable.