Starboard Value LP’s Triumph at Olive Garden Parent Darden

Starboard Value LP stands out as an active and influential hedge fund, always on the move. Its endeavors range from offering cooking tips to attempting acquisitions of various companies, including a maker of 3-D movie glasses, and even playing matchmaker for well-established Internet giants. Renowned for its activist investing strategies, Starboard Value LP is expected to savor its most significant triumph yet at the annual meeting of Olive Garden’s parent company, Darden Restaurants Inc. After a series of confrontations with Darden, spanning from critiquing its pasta preparation to the sale of Red Lobster, Starboard is poised to take control of the entire board, according to sources familiar with the situation.

Starboard Value LP: An Energetic Activist Investor

Starboard Value LP maintains an impressive pace when engaging with companies. Since the start of 2011, the firm has initiated 36 campaigns aimed at bringing about change within various companies, more than any other activist investor targeting companies valued at over $100 million, as reported by FactSet SharkWatch. A week in late September exemplifies the hedge fund’s relentless approach:

1. Influential Endorsements and the Yahoo Inc. Merger Suggestion Starboard secured two key endorsements from influential proxy advisers in its campaign against Darden. The following day, it made a bold move by suggesting a merger between Yahoo Inc. and AOL Inc., a former Starboard target.
2. Starboard’s $600 Million Offer to Acquire RealD Inc. Merely five days after the Yahoo merger suggestion, Starboard presented a $600 million offer to acquire RealD Inc., a company specializing in technology and glasses for 3-D movies. Both Yahoo and RealD responded positively to Starboard’s initiatives.

A History of Success for Starboard

Starboard Value LP has a remarkable track record, with an annual average return of 15.5% since its inception through May, surpassing the average of 6.1% for hedge funds tracked by HFR since the beginning of 2002. As its assets have soared from $200 million to over $3 billion, the hedge fund has set its sights on more significant targets, gaining widespread attention in the process.

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The Saucy Attack on Darden and the Prospect of Replacing the Board

The hedge fund recently made headlines when it launched a 294-slide attack on Darden, which garnered significant attention from various media outlets and commentators. Speculations are rife within the activist community that Starboard’s potential replacement of the entire board at Darden could set a precedent for similar victories in boardrooms nationwide. Securing a majority of the board is rare in activist campaigns, especially for companies with market capitalizations as large as Darden’s $6.6 billion.

The Stakes for Starboard Value LP

Starboard Value LP’s significant investment in Darden leaves much at stake. The hedge fund owns 8.8% of Darden’s shares, amounting to approximately $575 million. The success of the upcoming operational turnaround hinges on Starboard’s ability to execute its detailed operational plan and address the challenges of having too many decision-makers involved.

The Evolution of Starboard Value LP

Founded in 2002 as a unit of investment adviser Ramius, Starboard Value LP became an independent entity in 2011, led by Jeffrey Smith, Mark Mitchell, and Peter Feld. The team’s backgrounds in investment banks have influenced their roles within the hedge fund. As the CEO and chief investment officer, Mr. Smith draws on his mergers and acquisitions experience from Société Générale SA. Mr. Mitchell, formerly a top trader at BT Alex Brown Inc., now oversees risk management and trading. Leading the research division is Mr. Feld, who previously worked as an investment-banking analyst at Bank of America Corp. Additionally, the firm recently welcomed a fourth partner, Gavin Molinelli.

Starboard Value LP’s Approach and Impact on Companies

Starboard Value LP typically arrives at a company with a well-structured operational plan aimed at enhancing performance. However, this hands-on approach occasionally unsettles company management, implying that they are not adequately addressing certain issues. Nevertheless, Starboard maintains that opinions of the hedge fund often change once it becomes a part of the company’s board.

Views on Activist Approaches and the Path to Success

Richard Hill’s experience as chairman and interim chief executive of Tessera Technologies Inc., a semiconductor-technology and imaging-technology company, exemplifies the evolving perceptions of Starboard Value LP. Initially, he felt irked by the hedge fund’s assertiveness, perceiving it as undermining management’s abilities. However, during the ensuing board battle, he recognized the board nominees’ independence and their contribution to the business. Such examples highlight the potential benefits of activist involvement in companies.

Starboard Value LP’s Suggestions for Yahoo Inc.

Starboard Value LP’s letter to Yahoo focused on optimizing the company’s Asian assets and avoiding unnecessary taxes. The letter proposed a spin-off of Yahoo’s legacy operations involved in online advertising, followed by a merger with AOL. This approach aims to capitalize on Yahoo’s significant market capitalization of $40 billion, primarily derived from its Asian assets, including its stake in Alibaba Group Holding Ltd., a prominent Chinese e-commerce giant.

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The Outcome and Definition of Success for Starboard Value LP

Jeffrey Smith, the CEO of Starboard Value LP, believes that success should be measured in terms of creating value. Winning or losing proxy contests should not solely define success, as the hedge fund’s broader mission is to effect positive change and improve companies’ overall performance.

In conclusion, Starboard Value LP’s relentless pursuit of change and its impressive track record highlight the hedge fund’s status as a prominent activist investor. Its potential triumph at the Darden Restaurants Inc. annual meeting could be a game-changing victory, setting a precedent for more substantial changes in boardrooms across the country. While uncertainties persist, Starboard’s unique approach to operational turnarounds and its dedication to creating value position the hedge fund as a formidable force in the world of activism.

Source: https://www.wsj.com/articles/starboard-tastes-victory-at-olive-garden-parent-darden-1412884944