Jeffrey Smith, Starboard Value, “Using Board Dynamics to Enhance Shareholder Returns”

Notes from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 9, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

He says they have an average return after their 13D filing (when they file as an activist shareholder for a company) of about 20%.

Historical examples where they’ve already been on the board and have implemented their plan:

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Tessera Technologies (TSRA) — has a fantastic business in packaging design for semiconductors, a technology that they license.

They wanted to grow, so they invested in building and proving a new design based on some Digital Optics designs they had developed (for better focus/zoom in cell phones), and when manufacturers wouldn’t license it they bought a manufacturing facility and started to make the camera modules themselves.

So they turned a great licensing business into a bad manufacturing business.

Starboard got on the board, got a new CEO, and slashed costs and sold the digital optics business, the stock rose 60%.

Office Depot (ODP) — had declining revenue but increasing overhead, stock had fallen something like 80% over years before Starboard filed a 13D and began to get involved with the board.

ODP sold their Mexico JV, changed the board, merged with OfficeMax to generate synergies, found a good CEO. Stock more than doubled in two years.

Situations that are more current, they are involved at earlier stages now — they’ve discussed publicly but are not yet on the board.

Darden Restaurants (DRI). Olive Garden, LongHorn, specialty restaurants (Capital Grille, Yard House, etc). Largest full service restaurant company and huge real estate portfolio (inefficient use of capital). Pays a 4.6% dividend.

Real estate ownership (which is unusual in the group) is masking some of the underperformance in operating margins — they don’t pay rent, which would make margins look worse. Dramatically worse than peers RRGB, BLMN, BBRG, EAT, CAKE, DFRG, BWLD.

They have more scale and good brands and higher volume, their margins should be better, not worse, than their peers.

Stock has performed very poorly — underperformed peer group dramatically.

Starboard is pushing to put their plan into place at Darden, they’ll be releasing a detailed presentation in the next few days.

They should focus on operational improvement, evaluating real estate opportunities, evaluationg the most efficient use of the different concepts (maybe a spinout ...

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