From time to time, disgruntled shareholders or activist hedge funds attempt to oust the management of a company in favor of more “shareholder-friendly” executives. Most of the time, a hedge fund may accumulate a position that is large enough to pressure management to make changes. In the most extreme circumstances, a proxy fight is launched.
A proxy fight is when a shareholder, like a hedge fund, nominates its own slate of directors for an upcoming annual meeting. It tries to convince shareholders to vote its slate in and current management out. It’s called a proxy because that’s what shareholders do every year before the meeting — they give management their proxy to vote their shares.
That’s the annual mailing you get every year asking you to vote, which you usually throw out.
So what should you do if a company you own gets into a proxy fight?
It may not be so easy to figure it out, as current and prospective management will often wage PR wars. That’s why it is so important to know as much about the business as possible when you buy a stock. It will give you far greater insight into the true situation of the proxy fight than what the flood of media will be telling you.
It also allows you to verify who is telling the truth and who is lying, as does the Internet.
Chances are good that you’ll know if your company is being mismanaged and needs a change.
Lessons Learned From AHP’s Current Proxy Fight
It happens that a proxy fight was launched by Sessa Capital, a hedge fund with an 8% stake in a hotel REIT that I own, Ashford Hospitality Prime Inc (AHP). AHP is a spinoff of Ashford Hospitality Trust, Inc. (AHT), which also spun out from Ashford Inc (AINC), the external manager of both AHP and AHT.
On Aug. 28, AHP management announced it was putting the company up for sale. I know management pretty well at this point, since its CEO has also been the chief of AHT since its initial public offering in 2003. I considered management to be the best in the business. Not only have they steered AHT and AHP very well, they managed to keep AHT afloat during the financial crisis.
While other hotel REITs were collapsing under debt, cutting common and preferred dividends and suffering 20% declines in revenue per available room, AHT cut expenses by 17%, only cut the common dividend, refinanced all its debt and pushed maturities farther out, made something around a quarter-billion dollars with complex interest rate hedges and drew down all of their credit to buy back stock hand over fist.
I was immediately suspicious of Sessa Capital. As soon as the sale possibility was announced, Sessa doubled its position to about 2 million shares. Any idiot knows that a company sale is going to take months and possibly years. Sessa started moaning about how long it was taking … after about 100 days!
Lesson 1: Verify the activist’s complaints and claims. Are they reasonable? Do they pass the smell test?
Then Sessa got crowing about how management isn’t being fair to shareholders, files suit against AHP and starts a proxy fight!
Lesson 2: Does it sound like the activist has truly exhausted its efforts to engage management? Launching a proxy fight after 18 weeks seems rather rapid.
Not only that, I look over their slate of nominees and nobody has ever been in the hotel business! Well, one guy was on the board of an Indian hotel company — that’s right, India — and that had a whopping three properties.
Then I look at AHP management and, you know, nothing special — only a CEO with 25 years hotel experience, and other executives with more than 10 years.
Lesson 3: Do the nominated Board replacements make sense? If an activist is putting up a guy with no car experience to take over a car company, be suspicious.
I’m looking at Sessa’s proxy notice, and it’s clearly amateur hour. Sure, AHP is trading at 50% of what the company is probably worth. Management said in August that, using private market comparisons, the stock was worth $27 per share. The market has changed since then, but not enough to make it worth less than $20.
But hey, maybe there’s something I’m missing. I have to be rigorous, and make sure I’m not cognitively biased. So I searched the Internet and found that Sessa Capital is not an activist hedge fund. As near as I can tell, this is the first time they’ve launched a proxy fight.
Why would a fund with no proxy fight experience, and no experience in hotels, launch this battle? Do they really think they can do a better job of a sale than current management? What happens if there is no sale? Do I, as a shareholder, want a bunch of amateurs managing my hotels? Heck, no!
Lesson 4: Does the activist have a specific plan regarding what changes they want to make?
Sessa will never admit this, but it is obvious to me what’s going on. Just look at the timing of the doubling of its stock position. It just wants to grab control, and flip the company for more than its investment price. It wants its $2 to $3 profit and couldn’t care less about shareholders. These clowns didn’t even realize at first that if there’s a change in control, then AHP must pay AINC a management termination fee of about $5 per share.
They think they can beat that in court? Not a chance.
Lesson 5: Find a hidden agenda.
In this case, the answer was in the 13F filings and Sessa’s doubling of its position. One thing I’ve learned after 14 years of screenwriting and 21 years as an investor — the correct solutions are usually the simplest ones. Just be a detective that doesn’t engage in wild theories and you’ll figure it out pretty quickly.
This is a perfect example of how not to do a proxy fight. That’s why AHP shareholders should stick with management and trust their experience.
Lawrence Meyers owns shares of AHT, AHT’s Preferred D series, and AHP.