It’s Activists, Not Buffett, Who Can Change Corporate America?

It’s Activists, Not Buffett, Who Can Change Corporate America

By ANTHONY SCARAMUCCI

MAY 12, 2014, 9:30 AM 16 Comments

Anthony Scaramucci is founder and co-managing partner of SkyBridge Capital, a global asset management firm with about $10.5 billion in assets under management and advisement as of March 31.

In my adult life, I have had an intellectual love affair with Warren E. Buffett. Let’s face it: If some of us were being honest, we would have replaced our fading Farrah Fawcett posters with a splendid one of the “Oracle of Omaha,” after our 21st birthdays.

He helped explain the value of compound interest – which to anyone really paying attention is the master key to untold riches. A penny doubling every day for a month ($5.4 million) is worth more than receiving $10,000 a day ($300,000).

Lately, however, my favorite idol – like an aging model or athlete – is missing a beat and has lost a step with the times. It’s not that we won’t love Mr. Buffett anymore. Even a decade of underperformance won’t destroy his legacy.

Yet Mr. Buffett and his business partner, Charles Munger, with their highly reported comments that activism “scares the hell out of managers” and is “bad for corporate America” at the recent annual shareholder meeting, are missing the boat on today’s current shareholder activism in the market and what it means.

Today, the replacement for the buy-and-hold strategy is the savvy corporate activist.

To help capitalism evolve, corporations need to be re-engineered and reinvigorated about every 30 years. In the 1980s, Michael Milken developed the high-yield, or junk, bond market and, with the innovation, some of the brightest minds in finance developed the leveraged buyout, shaking big corporate management teams to the bone.

Natural human tendency is to get fat, lazy and a little clubby. Over 30 years, that can lead to tremendous economic inefficiency, and lack of growth and job creation. Just like your garden, corporate America occasionally needs to be weeded, replanted and re-fertilized.

So why has there been such a proliferation in activism over the last few years?

There are a number of factors driving this. First, it’s cyclical. We are overdue for the restructuring and retooling that our largest corporations need. After spending years repairing balance sheets after the crisis, being understandably concerned about abnormally slow postcrisis economic growth, the euro zone crisis and continuous political dysfunction, management teams are finally returning their focus to how best to compensate shareholders.

Corporations in the Standard & Poor’s 500-stock index are flush with about $2 trillion in cash on their balance sheets. That record amount is partly a function of our broken tax code and government policies that discourage hiring and investment.

Additionally, management teams are finally confident in sufficient continued economic stability. They also have the financing to pursue transactions that reduce costs, provide greater pricing power, expand product pipelines, divest underperforming or nonsynergistic assets and provide share buybacks and enhanced dividends which rightfully return capital to shareholders. Each of these steps is intended to benefit shareholders over the shorter and longer term.

Add to those factors the need for an overhaul to the tax code. Corporate renaissance and tax changes typically go hand in hand.

Just think about it for a moment. The last major tax reform happened in 1986 during the first part of President Ronald Reagan’s second term. The thousands of pages added to the code since then have created a situation where our corporate chieftains are working just as hard to avoid taxes as they are to make stuff. Perversely, their stockholders reward them for legally avoiding taxes and driving down costs, just as much as for growing profits or revenue.

Pfizer’s proposed merger with AstraZeneca is a good example of this – it is being done mainly to move Pfizer to Britain to save billions in taxes. If this deal goes through, the red light has to be on the dashboard of both branches of government, and I predict their hands will be forced into some sort of bipartisan agreement in Congress to finally change the tax laws.

Finally, there are the unintended consequences of Dodd-Frank legislation, which are now aiding the billionaire hedge fund activist. Embedded in the 2,000-plus page law are sections on minority shareholder rights. The purpose, with good intent, was to protect the mom-and-pop shareholders from big, bad, ugly chief executives and their clubby board members.

What the lawmakers did, in fact, is hand over a sledgehammer to guys like Carl Icahn, who can now establish a small position, walk into the boardroom and swing it down on the board’s conference table. This regulatory opportunity, in addition to the cash on hand, has created an enormous profit incentive for the activists. They have dug in and are shaking up corporate boardrooms all over America – and we are still in the early innings.

My firm has over $4 billion of our $10.5 billion in these strategies. This week, at our sixth annual SkyBridge Alternatives Conference, several prominent investors will be explaining their vision of this opportunity.

The greatest thing about our country is we still have one of the most adaptive cultures of all of the nations. Tell us the rules, and we will adapt and innovate to make a success of ourselves. Simplify the tax code, and there will be less emphasis on tax avoidance.

Deploy and allocate cash properly at the corporate level, and activists will move on to other activities. For the most part they are effecting change and putting people on their toes.

Mr. Buffett and Mr. Munger are missing this. Their contemporary, that young lad Mr. Icahn isn’t, and he is just amping up the fight.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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