The Art Of The Hedge Fund Attack Letter

Six components to taking down a target, as illustrated by hedge fund titans Carl Icahn and Daniel Loeb. Could the pen be mightier than the wallet? posted on

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Steve Marcus / Reuters

 

Hedge fund billionaires and activist investors Carl Icahn and Daniel Loeb wrote letters within hours of each other yesterday skewering their opponents at Dell and Sony, respectively. The similarities among their scathing takedowns can teach us a thing or two about how hedge fund giants get their point across, and the art of a well-crafted corporate attack letter.

3. “Very Undervalued.”


Both letters stress that the companies they’re fighting for change at are undervalued. Very undervalued.

“The Dell Board agreed, wrongly in my opinion, to let Michael Dell/Silver Lake purchase the stock at what I view is a very undervalued price.” —Icahn

“Our investment thesis is that Sony – composed of Electronics, Finance, and Entertainment – is not well understood by investors and is therefore significantly undervalued.” —Third Point

Nothing stings like telling shareholders they’re not getting the biggest bang for their buck.

4. Parse opponents’ media coverage and public comments.


In their respective letters, Icahn and Loeb pick apart recent media coverage about, and public statements by, their opponents’ actions and use it against them.

“Instead of accepting defeat with dignity, Michael Dell, in his interview with The Wall Street Journal, complained that the Merger Agreement he negotiated is unfair. This is the very Merger Agreement that Michael Dell/Silver Lake agreed to, and ironically, Michael Dell, not the stockholders, initiated this proposed transaction.” —Icahn

“We were surprised that after Entertainment’s highly-touted big budget summer film releases – After Earth and White House Down – bombed spectacularly at the box office, CEO [Kazuo] Hirai, speaking at the Allen & Co. Sun Valley conference a few weeks ago, brushed off these failures, saying: ‘I don’t worry about the Entertainment business, it’s doing just fine.’” —Third Point

5. Express confusion and concern over opponent’s actions.


Icahn and Loeb are very intelligent individuals. But both expressed bafflement and confusion over their opponents’ actions.

“I might be able to understand the actions of Michael Dell, who does not wish to lose a golden opportunity, but I cannot understand the actions of the Dell Board.” —Icahn, who also went on to say that Michael Dell’s recent statements on a share price offer “confused” him.

“We find it perplexing that Mr. Hirai does not worry about a division that has just released 2013’s versions of Waterworld and Ishtar back-to-back, instead giving free passes to Sony Pictures Entertainment Co-CEO’s Michael Lynton and Amy Pascal, the executives responsible for these debacles…We are also surprised that Sony’s CEO does not worry that Entertainment continues to generate profitability levels far below those of its competitors.” —Third Point

If some of the heaviest hitters in the business world can’t understand what you’re doing, do you think anyone else can?

6. Attack the leadership and what they’re doing to shareholders.


If all else fails, some good old fashioned name-calling and harsh criticism lobbed at the opposing company’s CEO could do the trick.

“Finally, I can’t help but note that Michael Dell has fared much better selling over 62 million shares in the $32 to $40 range over different periods in the past 10 years. Unfortunately for stockholders, he seems to be a much better market-timer than a CEO.” —Icahn, a fan of name-calling if there ever was one.

“While CEO Hirai focuses on Electronics, Entertainment is in desperate need of proper supervision. We believe Sony’s Board, which we understand continues to consider our suggestions, has plenty of reasons to worry about Entertainment and should enact our partial listing proposal quickly.” —Third Point

7. Research and Experts.


Icahn and Third Point make it a point to show that they’ve done their homework, and aren’t just pursuing a victory in long-held personal vendettas.

“I have spent many hours discussing Dell with experts, and there are many reasons to believe Michael Dell/Silver Lake’s proposal materially undervalues the company.” —Icahn

“Our research continues to reveal Entertainment’s hidden value. We believe the
Pictures unit profitability is anchored in higher margin (and higher multiple) international cable networks and television production, with the film business offering negligible profitability.”
—Third Point

8. Better off without you


If their opponents take nothing else away from the letters, both Icahn and Third Point want them to understand that they know what’s best for their respective target companies, and their vision is better than that of the current leadership.

“If Dell can replace Michael Dell, I think that the company would be worth far, far more. I do not say this facetiously. I fully expect to be able to identify a first class person to run Dell if our slate of directors are elected at the annual meeting… It is time for Michael Dell and the Dell Board to go.” —Icahn

“Unfortunately, Mr. Hirai’s remark is consistent with accounts we have heard repeatedly from key industry players and others: under Mr. Lynton and Ms. Pascal’s leadership, Entertainment’s culture is characterized by a complete lack of accountability and poor financial controls. To us, these latest blunders are prima
facie evidence of our thesis that Entertainment’s U.S.-based business is being ineffectively overseen and needs its own governance structure led by a board whose job it will be to worry about such troubling results.”
—Third Point

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