Oh Lord He is Wise!
Hedge Fund Manager Daniel Loeb Skewers CEOs, Returns 28 Percent
2005-08-18 00:02 (New York)
By Deepak Gopinath
Aug. 18 (Bloomberg) -- Daniel Loeb, who runs a $3.5 billion
hedge fund firm called Third Point LLC, has always had a big
mouth.
When he was 12, Loeb hectored the bullies at Paul Revere
Junior High School in his native Los Angeles. After the kids
threatened to beat him up, Loeb fought back -- with his wallet. He
hired a classmate, Robert Schwartz, as his bodyguard.
``Dan's mouth would get him into trouble,'' Schwartz recalls.
``He told everyone that he was paying me 25 cents a day, and no
one ever bugged him or me again.''
Now 43, Loeb is still sounding off -- only these days, he's
staking millions of dollars on his sharp tongue. Loeb has
positioned himself as Wall Street's merchant of venom, pillorying
chief executive officers who don't make him enough money. His
weapons: letters, filed publicly with the U.S. Securities and
Exchange Commission, bemoaning the management failures of
companies he's invested in.
Loeb bets on stocks, and sometimes against them, and then
agitates to drive their prices in his favor. After Loeb bought
into Potlatch Corp. and the stock slumped, he branded CEO
Pendleton Siegel a ``CVD'' -- chief value destroyer. He's called
two great-grandsons of one of the wood and paper company's
founders members of the ``Lucky Sperm Club.''
To Irik Sevin, CEO of fuel distributor Star Gas Partners LP,
another one of his picks, Loeb has written: ``Do what you do best:
retreat to your waterfront mansion in the Hamptons where you can
play tennis and hobnob with your fellow socialites.'' After that,
Sevin quit.
`Inexplicable Insouciance'
Loeb's goal is to shame companies into replacing their CEOs,
shaking up their boards -- whatever it takes to boost the value of
his investment. He pans executives' competence, social mores and
what he often calls their ``inexplicable insouciance.''
Loeb's pungent prose and hard numbers have earned him a
readership among analysts and money managers, says Steven
Chercover, a senior analyst at D.A. Davidson & Co. in Portland,
Oregon. Each tirade gets e-mailed among financial professionals,
who savor Loeb's taunts and research.
``Loeb is the Hunter S. Thompson of activist letter
writing,'' Chercover says, a reference to the writer who unleashed
the concept of freewheeling, gonzo journalism in books such as
``Fear and Loathing in Las Vegas.''
So far, Loeb's gonzo shareholder activism has made him and
his investors rich. New York-based Third Point has posted an
average annual return of 28.9 percent since Loeb founded the firm
in 1995, he says.
Fab 5 Freddy
That's more than double the 12.5 percent gain logged by
similar hedge funds during that period, according to Credit Suisse
First Boston Tremont Index LLC, a New York-based firm that tracks
fund performance. Like many hedge fund managers, Loeb charges an
annual management fee of 2 percent and takes a 20 percent cut of
all profits.
A lifelong surfer who counts among his friends hip-hop
impresario Fab 5 Freddy, Loeb goes out of his way to court
controversy. His letters have outraged executives and unnerved
some investors.
``I've dealt with all kinds of people on Wall Street, and
Loeb is pretty much at the extreme,'' Potlatch's Siegel says.
Third Point's tactics have prompted at least one lawsuit,
later dropped, claiming that Loeb smeared a company on the Silicon
Investor Internet message board. Loeb's Web handle, according to
the 1999 suit: Mr. Pink, the name of one of the criminals in
Quentin Tarantino's 1992 film ``Reservoir Dogs.''
``I can't confirm or deny any relationship with Mr. Pink,''
Loeb says. ``But I do agree with some of the views he expresses.''
Extreme Example
Loeb is an extreme example of the shareholder activism that's
ripped through corporate America since the 1980s. Public pension
funds such as the $190 billion California Public Employees'
Retirement System led the way, flexing their financial muscles on
issues ranging from shareholder returns to workplace violence.
Then, mutual fund managers such as Michael Price, now
president of Short Hills, New Jersey-based MFP Investors LLC,
charged in as they amassed a growing share of the nation's
corporate equity during the 1990s stock market boom. Over the
years, institutional shareholders have helped oust the CEOs of
some of the mightiest companies in the land, from John Akers of
International Business Machines Corp., to Carly Fiorina of Hewlett-
Packard Co., to Philip Purcell of Morgan Stanley.
Now, hedge fund managers have joined the fray, says Patrick
McGurn, executive vice president of Institutional Shareholder
Services, a Rockville, Maryland-based company that advises fund
managers on corporate governance.
`Mandate of Leadership'
Loosely regulated investment vehicles for institutions and
the rich, hedge funds have what it takes to rattle companies:
money -- and lots of it. Their combined assets have soared to
about $1.1 trillion this year from $490 billion in 2000, according
to Chicago-based Hedge Fund Research Inc.
``Hedge funds are taking the mandate of leadership,'' McGurn
says.
What sets Loeb apart, in addition to his returns, is his
hyperkinetic -- and hyperpublic -- style. He trumpets his
grievances and, rather than gathering shareholder proxies to swing
corporate votes like many other activist shareholders do, he
heckles management.
``Loeb hasn't been in proxy contests -- he's more of a
rabble-rouser,'' says Ray French, chairman of Cayman Islands-based
Strongbow Capital Management Ltd., which manages an activist fund.
Loeb makes some investors nervous, says Paul Isaac, chief
investment officer of Cadogan Management LLC, a New York-based
asset management firm that invests in hedge funds. ``It doesn't
reflect on Dan's ability as a fund manager, but some investors are
not comfortable with the public positions he takes,'' he says.
Ashtanga Yoga
Sitting in an open-neck, short-sleeve shirt in his glass-
walled office on Madison Avenue, Loeb doesn't come across as a
curmudgeon. Five feet, nine inches tall and a trim 158 pounds,
he's a practitioner of Ashtanga yoga, which involves synchronizing
the breath with a series of postures to detoxify the body and calm
the mind. He travels to a yoga school in Mysore, India, every 18
months. His face is unlined, his brown hair just starting to gray.
On his bookshelf, ``Optimal Trading Strategies,'' a math-
heavy tome about how to minimize trading costs, sits alongside
``Art Law,'' a legal guide for artists and art collectors. Nearby
is a novel by 1978 Nobel Laureate Isaac Bashevis Singer, whose
stories often draw on Jewish folklore and mysticism.
Stacked against the wall is part of Loeb's burgeoning art
collection: photographs by Richard Prince, whose work explores
America's obsession with celebrity, originality and ownership.
Prince's most controversial work is ``Spiritual America,'' a
photographic image of actress Brooke Shields, in the nude, at age
10.
`Mediocre Managers'
Between typing e-mails and calling out instructions to his
traders, Loeb defends his approach to investing and shareholder
activism.
``Most of what we do is good stock picking,'' Loeb says, his
voice low. ``We don't like investors who have a conformist
mentality and are drawn to mediocre managers who guarantee them
dull but, in their opinion, predictable results.''
Daniel Seth Loeb has been prowling for an edge since his
boyhood days catching waves at Third Point, the biggest break at
Malibu Surfrider Beach, for which he named his company. One of
three children of Ronald and Clare Spark Loeb, young Dan grew up
in a 4,000-square-foot house in Santa Monica Canyon. His father
was a partner at the Los Angeles law firm of Irell & Manella LLP.
His mother is a historian. Loeb’s great-aunt, Ruth Handler,
created the Barbie doll and co-founded Mattel Inc.
Milo Minderbinder
Even as a kid, Loeb dreamed of striking it rich, classmate
Schwartz says. At Palisades High School, one of Loeb's English
teachers nicknamed him Milo Minderbinder, after the scheming
entrepreneur who controls the black market in Joseph Heller’s
novel ``Catch-22,'' says Schwartz, a partner at Third Point
Ventures, Loeb's venture capital unit in Silicon Valley.
``Dan was investing in stocks in high school and idolized
Milo Minderbinder,'' Schwartz says. ``The fact is, anyone who knew
Dan in high school, it would be a no-brainer that he would be
doing the things he's doing now.''
After two years at the University of California, Berkeley,
Loeb set off for New York, the money capital of the world, to
study economics at Columbia University. As he'd done at Palisades
High, he kept playing the stock market. By 1983, when he was a
college senior, Loeb was sitting on $120,000 in profits, he says.
On a roll, Loeb reached for more. He sank his money into
Puritan-Bennett Inc., which makes medical respirators. Then the
Associated Press reported that the companies' anesthesia machines
had been linked to several deaths. The stock fell, and Loeb lost
everything. Not only that, he'd leveraged his investments by
buying on margin. He also owed his dad $7,000 for tax liabilities.
Loeb says it took him almost 10 years to pay back his father.
`Very Ambitious'
``That was a 10-year lesson in the perils of leverage and
overconcentrating positions,'' Loeb says.
After graduating from Columbia with a degree in economics,
Loeb joined Warburg Pincus LLC, where John Vogelstein, one of his
father's friends, worked. ``He was very ambitious, very
entrepreneurial,'' says Vogelstein, now the firm's vice chairman.
And like Milo Minderbinder, Loeb was hungry for a profit. He
says he persuaded his godfather, Robert Robin, an outside counsel
for Chicago-based CNW Corp., to introduce him to management. Loeb
looked over the books and decided the company was undervalued.
After Warburg Pincus bought a stake in CNW, the stock rose and the
firm pocketed $20 million, Loeb says. ``We made a nice profit,''
Vogelstein says.
Restless, Loeb left Warburg Pincus in 1987 and joined Island
Records Inc. in New York as director of corporate development. The
record company got its start in Jamaica with reggae music before
going on to make its money with U2 and The Cranberries.
Bob Marley Dispute
Loeb spent the next year helping Island Records secure debt
financing. At one point, he traveled to Kingston, Jamaica, with
Island founder Chris Blackwell to try to resolve a dispute over
the estate of reggae superstar Bob Marley, who died in 1981.
``Dan saw value in Island Records when no one else did,''
says Blackwell, 68, who went on to found Palm Pictures Inc. in New
York. A big investor eventually saw value in Island, too:
Blackwell sold his company to Baarn, Netherlands-based PolyGram NV
in 1989 for $272 million.
By now, Loeb had spent almost a decade in New York and had
immersed himself in the city's art and music scene. Along the way,
he'd met Fred Brathwaite, also known as Fab 5 Freddy. A graffiti
artist in the 1980s, Freddy went on to become one of the most
popular figures in hip-hop, helping to take rap music mainstream
as the first host of Yo! MTV Raps, a music video program on the
MTV cable television network.
`Financial Hip'
Freddy says he turned Loeb on to cutting-edge urban music. He
and Loeb hung out at the Odeon, the chrome-tinged temple of hard
partying immortalized in Jay McInerney's 1984 novel ``Bright
Lights, Big City.'' Once, they went out to genteel East Hampton
and blasted NWA, the pioneers of hardcore gangsta rap, across
Georgica Beach, Freddy says. For a while, Loeb lived on 7th Street
at Avenue D, in the gritty East Village.
``I'm hip-hop, he's financial hip,'' Freddy, 44, says of
Loeb.
From Island Records, Loeb bounced to Lafer Equity Investors
LP, a New York-based hedge fund, and then, in 1991, to Jefferies &
Co. in Los Angeles, as an analyst. Following the 1990 collapse of
Michael Milken's Drexel Burnham Lambert Inc., Jefferies CEO Frank
Baxter was hiring ex-Drexelites and pushing into the market for
high-yield bonds.
Loeb dug into Drexel and struck gold. Drexel had issued
certificates of beneficial interest to creditors and employees.
CBIs designate nonvoting securities with underlying assets of one
corporation as debt securities of another company. Drexel's were
undervalued, Loeb concluded.
2 a.m. Calls
Loeb says he began to track down and trade the CBIs on his
own. Working off a list of holders he'd gotten from the bankruptcy
court, Loeb arrived at work at 2 a.m. to call investors in Europe.
His colleagues envied his knack for turning seemingly oddball
ideas into profit, says Jon Brooks, who worked with Loeb at
Jefferies and now runs JMB Capital Partners LP, a $500 million
hedge fund firm in Los Angeles.
Soon, Loeb says, he was forging business relationships with
hedge fund managers and Wall Street heavy hitters such as David
Tepper, who ran junk bond trading at Goldman, Sachs & Co. and
later opened his own hedge fund firm: Chatham, New Jersey-based
Appaloosa Management LP. Hoping to pull down more money, Loeb
jumped to Citicorp Securities Inc. in 1994, as a junk bond
salesman. A year later, he struck out on his own, founding Third
Point in New York.
He got off to a rocky start. Loeb says he'd hoped to raise
$10 million for his fund. Instead, he says, he cobbled together
just $3 million from friends and family. He didn't hire his first
full-time employee until 1997.
Mr. Pink's Picks
It was about this time that Mr. Pink made his appearance on
www.siliconinvestor.com, a Web site now owned by Kansas City-based
InvestorsHub.com Inc. that enables people to post anonymous
messages about publicly traded companies.
At 5:36 p.m. on March 10, 1997, someone calling himself Mr.
Pink started a new Silicon Investor thread: ``Mr. Pink's Picks:
Selected event-driven value investments.'' Mr. Pink listed
``Minister of Truth/Lord of All Things'' as his occupation and
title. His early picks included Consolidated Freightways Corp.;
mortuary operator Loewen Group Inc.; and Ralcorp Holdings Inc.,
maker of Ry-Krisp crackers.
Mr. Pink warned his readers to avoid poorly managed
companies. ``When you sleep with dogs, you wake up. . . poor,'' he
wrote that April.
`Shooting Fish in a Barrel'
Over at Third Point, Loeb was hunting for dogs. He began
shorting the shares of shaky companies that had been swept upward
during the longest stock market boom in history. ``It was like
shooting fish in a barrel,'' Loeb says.
In 1998, for example, when the near collapse of Long-Term
Capital Management LP roiled Wall Street, Loeb bet against
FirstPlus Financial Group Inc., a mortgage lender that had put
itself up for sale. Loeb figured the market turbulence would
scupper any deal. That April, FirstPlus stock traded as high as
$54.875. By December, it had cratered to $1.937 -- a boon for a
short seller like Loeb.
Another company that caught Loeb's eye was Hitsgalore.com
Inc., a Web portal company that had reported less than $20,000 of
revenue in 1998. The stock leaped to $20.125 in May 1999 from
$2.38 that March, valuing the Rancho Cucamonga, California-based
company at $1 billion.
Hitsgalore soon came crashing back to Earth. On May 11,
Bloomberg News reported that founder Dorian Reed had had a run-in
with the Federal Trade Commission over false claims he'd made to
customers of an earlier Internet firm. Hitsgalore stock, trading
under the ticker HITT, tanked. Mr. Pink piled on, referring to the
company as ``sHITT,'' declaring on his thread, ``These crooks
belong in jail.'' Mr. Pink dared the company to sue him.
Hitsgalore Lawsuit
Hitsgalore obliged, suing Mr. Pink, whom it identified as
Loeb. Loeb says he was shorting Hitsgalore stock at the time. In
the suit, filed in June 1999 in U.S. District Court in Tampa,
Florida, the company claimed that Loeb and other Web posters had
conspired to defame Hitsgalore. The company dropped the suit in
April 2000. That same month, Hitsgalore sued Bloomberg News for
libel; Los Angeles County Superior Court Judge Paul Boland
dismissed that complaint in October 2000. Hitsgalore has since
abandoned its Internet business; in March 2001 the company changed
its name to Diamond Hitts Production Inc.
By early 2000, Third Point's assets under management had
grown to a modest $136 million, and Loeb was looking for a way to
gain leverage over companies. That March, an activist hedge fund
manager named Robert Chapman wrote an angry, public letter to J.
Michael Wilson, CEO of American Community Properties Trust, a St.
Charles, Maryland-based real estate investment trust. Third Point
also owned a stake in American Community Properties, and Chapman’s
missive caught Loeb's attention.
`Radiating Weapon'
Chapman, 39, who runs Los Angeles-based Chapman Capital LLC,
had attached his letter to a Schedule 13D form, a public document
that the SEC requires investors to file when they buy or sell
shares if they own more than 5 percent of a company's outstanding
stock and intend to influence how the company does business. In
his 13D, Chapman analyzed American Community Properties, its value
and prospects and laced into the company's management.
``The power of hostile 13Ds comes from the publicity,''
Chapman says now. ``Ridicule is a radiating weapon, like a nuclear
bomb.''
Loeb says he liked Chapman's style. That September, Loeb
fired off a 13D letter of his own to William Stiritz, chairman of
both Agribrands International Inc. and Ralcorp Holdings, both
based in St. Louis.
$20 Million Gain
Ralcorp, which makes store-brand foods, had offered $39 per
share for Agribrands, which makes animal feed. Loeb, who owned
505,400 shares of Agribrands, argued the bid was too low. Cargill
Inc. agreed. That December, Cargill bid $54.50 for Agribrands,
topping the Ralcorp offer. Loeb says he made $20 million.
Since then, Loeb has filed about two dozen other 13D letters,
with varying results. If nothing else, his dispatches are a
departure from run-of-the-mill business correspondence.
In April 2003, for example, Loeb started to pick a fight with
Spokane, Washington-based Potlatch. CEO Siegel says Loeb berated
management for the company's stock performance during an analyst
meeting that month. Then Loeb sent Siegel an open letter
criticizing the CEO's performance and blasting the company for its
phased-voting rule, which required shareholders to own Potlatch
stock for four years before being eligible for full voting rights.
``Since you ascended to your current role of Chief Value Destroyer
(`CVD') when you assumed the formal title of CEO in 1999, the
shares have dropped over 45 percent, a destruction of shareholder
value in excess of $520 million,'' Loeb wrote.
Getting Results
``We find it ironic that shareholders must endure four years
of your destructive stewardship in order to be entitled to a full
vote,'' he said.
Potlatch dropped its voting rule in May 2005. Its stock,
which traded as low as $18.75 in March 2003, before Loeb began his
campaign, closed at $56.37 on Aug. 9, for a gain of 200 percent.
Siegel says Loeb had nothing to do with the rule change. ``He
was equally responsible for the fall of the Taliban,'' he says.
Last February, Loeb fired off another letter, this one to
Sevin, CEO of Stamford, Connecticut-based Star Gas, which
distributes heating oil.
``A review of your record reveals years of value destruction
and strategic blunders which have led us to dub you one of the
most dangerous and incompetent executives in America,'' Loeb
wrote.
Loeb, who owns 6.5 percent of Star Gas, didn't stop there. He
said he’d learned that Cornell University offered a scholarship in
Sevin's name.
`Town Hanging'
``One can only pity the poor student who suffers the
indignity of attaching your name to his academic record,'' he
said.
Sevin resigned on March 7, three weeks after Loeb sent his
letter. Star Gas stock has fallen since Loeb bought in late
October 2004, losing 25 percent through Aug. 9.
``Sometimes a town hanging is useful to establish my
reputation for future dealings with unscrupulous CEOs,'' Loeb
says. Star Gas spokesman Robert Rinderman says Sevin declines to
comment.
Loeb doesn't always get what he wants. After buying into
Salton Inc. in September 2004, Loeb began agitating for CEO
Leonhard Dreimann to resign. Last February, he wrote to the board
of the Lake Forest, Illinois-based company, which makes George
Foreman grills, and berated the directors for what Loeb saw as
management failures. He also criticized them for squandering money
sponsoring the U.S. Open tennis final, where twin pop icons Mary-
Kate and Ashley Olsen were among the celebrity spectators that
year.
`Hobnobbing'
Loeb said he was shocked to see the Salton name emblazoned on
the stadium walls.
``My bewilderment quickly turned to anger when I saw the
crowd seeking autographs from the Olsen twins just below the
private box that seemed to be occupied by Mr. Dreimann and others
who were enjoying the match and summer sun while hobnobbing,
snacking on shrimp cocktails and sipping chilled
Gewuerztraminer,'' Loeb told Salton’s board.
Loeb wrote to Dreimann again in April, this time to say he
was unloading his 708,300 shares, which had fallen 80 percent
since he started buying in September 2004.
``The final decision to exit the position was not based on
your incompetence, arrogance and innumerable shortcomings alone,''
Loeb said. ``It was my conclusion that the company's board is
governed by a toothless crew of cronies or pathetically weak
individuals who I can only conclude are in way over their heads
and unable to take appropriate action.'' Dreimann didn't return
calls seeking comment.
Critics
Some shareholder activists disagree with Loeb's in-your-face
style. Working behind the scenes is often more effective, says
Eric Miller, who manages $2.4 billion of stocks at Heartland
Advisors Inc., a Milwaukee-based mutual fund company that's taken
an activist stance.
``Going public can be time-consuming and costly,'' Miller
says. ``It is our last option.''
What's more, dealing with a single, aggressive shareholder
can distract executives from job one: running the company.
``Businesses today have too many other problems to waste time
with one investor,'' says corporate investor Irwin Jacobs, who
earned the nickname ``Irv the Liquidator'' in the 1980s. Jacobs,
now 63 and chairman of Genmar Holdings Inc., a Minneapolis-based
boat company, frequently bought minority stakes, pushed for change
and then sold his stake at a profit, either to the target company
or to another investor. ``A lot of what I did in the 1980s, I
wouldn't do anymore,'' he says.
Whatever his critics say, Loeb has so far had just one down
year. Third Point lost 7 percent in 2002.
Trappings of Success
Today, Loeb enjoys the trappings of success. He lives in
Greenwich Village and, like some of the executives he lampoons,
owns a house in the Hamptons. This year, he and his wife,
Margaret, were feted at the Waldorf-Astoria Hotel by Prep for
Prep, a foundation that helps send minority kids to elite New York
private schools. The couple had pledged $1 million to the charity.
Loeb's art collection now includes works by German pop artist
Sigmar Polke and California artist Mike Kelley. In August, Loeb
was preparing to move Third Point from its Madison Avenue digs to
two floors in Lever House, the Modernist landmark on Park Avenue.
Loeb says he didn't set out to become a shareholder activist.
``We are not trying to take over companies,'' he says. ``We are
not trying to change control. We are just trying to get boards and
managements to do the right thing.''
`Fight for Control'
All the same, Loeb doesn't rule out getting even tougher on
corporate bosses. ``I'm sure that there'll come a day when we'll
make an offer for a company or fight for control of a board,'' he
says.
As for Mr. Pink, he still posts occasionally on Silicon
Investor, where his thread has received more than 18,000 messages
since 1997. In April, Mr. Pink posted a Web link to a news story
about Loeb, noting, ``Interesting article about an activist.''
Lately, Mr. Pink's picks have included Consol Energy Inc., a
coal company; Dade Behring Inc., which makes medical diagnostic
equipment; and Magellan Health Services Inc., which manages mental
health treatment for insurers.
Dan Loeb's Third Point owns all three.
--Editors: Gillen, Jahncke
Story illustration: To graph the CSFB/Tremont Event Driven Index,
an asset-weighted hedge fund index, type {HEDGDRIV <Index> GP}.
To contact the reporter on this story:
Deepak Gopinath at (212) 617-4189 or
dgopinath@bloomberg.net
To contact the editor responsible for this story:
Ronald Henkoff at (212) 617-2347 or
rhenkoff@bloomberg.net |
