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CEOs are opening their boardrooms to hedge fund 'white squires' to keep other activists out

Key Points
  • On Monday, embattled Papa John's announced that Starboard Value, led by Jeff Smith, would be investing as much as $250 million, and named Smith as chairman.
  • Chemicals maker Ashland Global struck a deal with Neuberger Berman after battling the hedge fund Cruiser Capital Advisors.
  • The concept of a "white squire" is not a new phenomenon, but it's becoming an increasingly popular one as more and more management teams open up to the idea of letting some activists in to keep others out.
Jeffrey Smith speaking at the 2017 Delivering Alpha conference in New York on Sept. 12, 2017.
David A. Grogan | CNBC

When it comes to defending a company against an agitated investor, the devil you know may be better than the devil you don't.

That's the recent mindset among corporations and investors alike when it comes to fending off potential intruders — and it's increasingly blurring the lines of how management views the role of activist investors.

Case in point is Papa John's International. On Monday, the pizza maker announced that Starboard Value, led by Jeffrey Smith, would be investing as much as $250 million, and named Smith as chairman. For some, the move was surprising. Just four years ago, Fortune Magazine named Smith the "investor CEOs fear most" after Starboard upended the entire board at Darden amid a bruising proxy fight.

But rather than fear him, Papa John's welcomed Smith as a means of stability for the company after a year of chaos.

"We approached the company and said we want to get involved and we want to help and we want to provide leadership," Smith told CNBC's David Faber in an interview this week.

"Obviously, we're in a moment of distress here," Steve Ritchie, Papa John's CEO, said in the CNBC interview. "It's been a difficult year for the brand but we know we have a plan to do the right things to move forward."

'White squire'

The concept of an activist investor as a "white squire" is not a new phenomenon, per se, but it's becoming an increasingly popular one. The trend has been exacerbated as traditional activists have gained more credibility with the broader shareholder base, according to Jim Rossman, head of shareholder advisory at Lazard. He added that as newer activists cropped up, the more traditional ones were seen as more sophisticated and capable of fending off the smaller funds.

"It's a new factor on the playing board for public companies," said Rossman, who works with large corporations on activist or potential activist situations. "We think it's interesting and potentially useful to public companies because it's more long term, it's larger sources of capital and can even be more creative than what we've had to work with in the past."

That's how Starboard investment was seen as beneficial at Papa John's. For the better part of a year, the pizza chain had been embroiled in drama after founder John Schnatter made comments construed as racial epithets. He stepped down first as CEO and later as chairman, and the company launched a strategic-review process, which ultimately yielded Starboard's investment. Meanwhile, Schnatter sued the company for wrongful termination and sought to claw back influence by matching Smith's investment offer, which the company denied.

Starboard's investment and role on the board was seen by the broader market as stabilizing Papa John's after a roller-coaster year.

Keith Meister speaking at the 22nd Annual Sohn Investment Conference on May 8, 2017.
Heidi Gutman | CNBC

But Starboard saw the other side of this trend. It had been reported by several news outlets that Smith's firm was building a stake in MGM Resorts International. Shortly thereafter, the company announced a deal to put Corvex Management's Keith Meister on the board, a move that was seen at least, temporarily, as thwarting any rattling by another hedge fund.


Large, institutional investors are also getting in on the trend. Ashland Global had been battling the hedge fund Cruiser Capital Advisors, which was seeking four seats on the chemical company's board. Neuberger Berman, another investor, swooped in a few weeks ago and made a separate deal to add two fresh directors to the board. Charles Kantor, a senior portfolio manager at Neuberger Berman, told The Wall Street Journal, "The goal here was to try and put this to bed."

For years, several hedge funds have preferred the moniker "constructivist" to that of "activist." The difference, they say, is that a constructivist will advise management privately behind the scenes, rather than seek public fights. ValueAct, founded by Jeff Ubben, and Blue Harbour, led by Clifton Robbins, are often categorized as such.

Lately, though it's a broader array of activists as "white squires" that are moving up on the list of tools used to defend corporations against an unwanted invader, according to advisors who work in that world. In addition to the public examples this year, there are several others that are currently in the works behind the scenes, people with knowledge of those situations said.

But, at the end of the day, it's important for companies to know who they're cozying up to.

"Even though there's an overlap of what the company wants and the shareholder wants, the time frame in most cases is different, Lazard's Rossman said. "Companies have a longer-term view of their time frame, shareholders typically have a shorter term. You have to be cognizant of a shorter-term time; you can't be naive."