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Filing a Form 13D Doesn’t Make Hudson Executive Capital an Activist Investor

Well, it certainly doesn’t hurt. Still, it takes more than an SEC filing or an angry letter to management to encourage (or force) change at an underperforming portfolio company with entrenched executives and directors.

Hudson Executive Capital (HEC) made a splash when it formed early last year, although we remain skeptical. Last week HEC finally announced its first project, as financial media picked up the story approvingly.

Look, we want a new activist investor with strong connections at big companies to succeed. Based on what we’ve seen so far, and even after HEC filed its first-ever Form 13D, we doubt they’re the firm.

It’s worth studying the situation. Established activist Engaged Capital began the work at medical device manufacturer HeartWare (HTWR). It appears HEC merely followed Engaged into the company, with no clear or specific plan for change there.

HeartWare Was Due

The company was ripe for an activist project, losing money for years. Its share price dove from over $90 to around $70 in the first half of 2015, then recovered back to $90. On Sep 1, HTWR announced a deal to acquire Valtech, with a largely untested technology. This drove shares down over 20% in a week.

Engaged jumped right in. Its letter to the BoD on Oct 5 objected to the deal, and its Form 13F for the third quarter disclosed a 1.3% ownership in the company that it evidently acquired during the quarter. The letter demonstrated significant research into the company and the proposed deal.

Next, Engaged notified the company of three BoD nominees, on Dec 30, just at the deadline. Engaged researched and recruited two industry executives for its slate.

Most recently, Engaged made good on its opposition to the deal. On Jan 7, it filed a preliminary proxy statement for the special shareholder meeting, to solicit votes against the deal.

Engaged has suffered, though. After a pessimistic analyst presentation on Jan 11, shares plunged to a long-time low of under $30.

HEC Joins In

Late last week HEC announced a 5% position in HTWR. Its filing says only that it had meetings and calls with company management and other shareholders, on the usual range of business subjects, including Valtech.

It appears HEC started buying shares after Engaged disclosed its letter to the BoD, probably in mid-October (based on the share prices and volumes in the Form 13D). By Nov 19 it had 2% of the outstanding shares. It added another 1.4% from Nov 19 through Jan 7 in a series of small purchases a few times each week.

HEC triggered the filing with a purchase of 1.6% of the outstanding shares on Jan 12-13, immediately after the Jan 11 analyst presentation. This purchase brought its holdings to just over 5%.

Activist Investing?

First of all, we have no view about Engaged’s plan for HTWR. The company and the proposed Valtech deal are complicated, and we haven’t delved into the nuances to form an opinion about who should prevail.

Still, Engaged:

  1. ❖researched the company thoroughly

  2. ❖interacted with management

  3. ❖recruited director nominees

  4. ❖started not one but two proxy contests: at the special meeting to approve the Valtech deal, and at the annual meeting to elect directors.

HEC bought shares following Engaged, and after share price declines.

Whatever HEC is doing, it doesn’t qualify as activist investing. We noted previously that HEC affirmatively avoids proxy contests or public calls for change at portfolio companies. HTWR has to worry about Engaged, so we can’t imagine it will take HEC seriously as an activist investor. Maybe as a merchant or investment banker, but certainly not as a shareholder with an agenda that HTWR should worry about.

Following other activist investors like Engaged also is a strategy. These PMs relinquish alpha, of course. If HEC takes this course, then it doesn’t need the high-profile “CEO Partners” that it touts as the key to change at portfolio companies. It also doesn’t need the five-person investment research team (none of which appear to have any activist investing experience) or the seven-person back office. It just needs a subscription to SharkRepellent and an algorithm.

We’d love to think HEC can have an impact at HTWR. We’d bet on Engaged.

First appeared at The Activist Investor here.