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Its Activists, Not Buffett, Who Can Change
Corporate America
By ANTHONY SCARAMUCCI
May 12, 2014 9:30 am
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. Lets 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. Its not that we
wont love Mr. Buffett anymore. Even a decade of underperformance
wont 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 todays current
shareholder activism in the market and what it means.
Another View
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Vi ew al l posts
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, its 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 & Poors 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
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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 Reagans
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.
Pfizers 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 boards 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.
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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 isnt, and he is just amping up the fight.
2014 The New York Times Company