Investor activism: alternative warfare

Activist investors are finding out the hard way that conventional warfare trumps newfangled techniques. For Starboard Value, one of the dissidents trying to shake up Darden Restaurants (home to the Red Lobster chain), that message may have arrived too late. But Bill Ackman still has time to adapt his tactics as he tries to fashion a tie-up between Valeant Pharmaceuticals and Allergan.

A week ago, despite stiff opposition from investors led by Starboard and Barington Capital, Darden sold Red Lobster for $2.1bn to a private equity firm. The dissidents wanted the property assets of Red Lobster and sister chain Olive Garden to be separated before any sale. The announced deal precludes that. And since Red Lobster is a division, no shareholder vote is required. Starboard did manage to force a special shareholder meeting to discuss the issue, but that meeting could not compel Darden into any action.

Starboard's only recourse now is to take the more conventional route and force a vote at the annual meeting. It wants to sack the entire board in the autumn. But Red Lobster may be gone by then. A better tactic would have been to lay low until just before this year's meeting so management would not have had time to quickly dump the seafood chain.

Bill Ackman's machinations at Allergan are numerous. First, he partnered with Valeant to take a 9.7 per cent stake in Allergan, a novel activist/hostile bid gambit. Now, he seeks a "shadow", non-binding shareholder vote that would press resistant Allergan management into talks. But for all the theatrics, the path to winning Allergan is simple: just keep raising the bid and/or throw out the recalcitrant board. As with Darden, the latter is difficult since Allergan has just held its shareholder meeting. Yet Mr Ackman's camp grasps the former and is expected to raise its bid soon. And if eventually triumphant, it will be so for simply paying a good price, not due to cute share purchases or a sham referendum.

The crowded field of activists is forcing them to act both prematurely and flamboyantly to stand out. But simply standing out will not be enough to advance their agendas.

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