Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations
Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations is a must-read exploration of deep value investment strategy, describing the evolution of the theories of valuation and shareholder activism from Graham to Icahn and beyond. The book combines engaging anecdotes with industry research to illustrate the principles and methods of this complex strategy, and explains the reasoning behind seemingly incomprehensible activist maneuvers. Written by an active value investor, Deep Value provides an insider's perspective on shareholder activist strategies in a format accessible to both professional investors and laypeople.
The Deep Value investment philosophy as described by Graham initially identified targets by their discount to liquidation value. This approach was extremely effective, but those opportunities are few and far between in the modern market, forcing activists to adapt. Current activists assess value from a much broader palate, and exploit a much wider range of tools to achieve their goals. Deep Value enumerates and expands upon the resources and strategies available to value investors today, and describes how the economic climate is allowing value investing to re-emerge. Topics include:
- Target identification, and determining the most advantageous ends
- Strategies and tactics of effective activism
- Unseating management and fomenting change
- Eyeing conditions for the next M&A boom
Activist hedge funds have been quiet since the early 2000s, but economic conditions, shareholder sentiment, and available opportunities are creating a fertile environment for another golden age of activism. Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations provides the in-depth information investors need to get up to speed before getting left behind.
About the Author xvii
Chapter 1 The Icahn Manifesto 1
Chapter 2 Contrarians at the Gate 19
Chapter 3 Warren Buffett: Liquidator to Operator 35
Chapter 4 The Acquirer's Multiple 53
Chapter 5 A Clockwork Market 77
Chapter 6 Trading in Glamour: The Conglomerate Era 99
Chapter 7 Catch a Falling Knife 119
Chapter 8 The Art of the Corporate Raid 151
Chapter 9 How Hannibal Profits From His Victories 169
Chapter 10 Applied Deep Value 187
TOBIAS E. CARLISLE is the founder and managing director of Eyquem Investment Management LLC and serves as portfolio manager of the firm’s fund and managed accounts. He is best known as the author of the well-regarded website greenbackd.com and as co-author of Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (Wiley). He has extensive experience in business valuation, portfolio management, investment research, public company corporate governance, and corporate law. Prior to founding Eyquem in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions, he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.
Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (WILEY; August 2014: Hardcover & e-book; $85; ISBN: 978-1-118-74796-4) is a must-read exploration of the philosophy of deep value investment. Written by Tobias Carlisle—an active deep value investor and the well-known blogger at greenbackd.com — this important resource describes the evolution of the various theories of intrinsic value and activist investment from Benjamin Graham to Warren Buffett to Carl Icahn and beyond. Filled with engaging anecdotes, penetrating statistical analysis and meticulous research, the book illustrates the principles and strategies of deep value investing and examines the counterintuitive idea behind its extraordinary performance.
“Deep value is investment triumph disguised as business disaster. It is a simple, but counterintuitive idea: Under the right conditions, losing stocks – those in crisis, with apparently failing businesses, and uncertain futures – offer unusually favorable investment prospects,” explains Carlisle. “This book is an investigation of the evidence, and the conditions under which losing stocks become asymmetric opportunities, with limited downside and enormous upside.”
Carlisle presents an insider’s perspective on valuation and activism in a format that is accessible to both professional and general investors. The value investment philosophy as first described by Benjamin Graham identified targets by their discount to liquidation value: the most conservative estimate of value. This approach has proven extremely effective; however, those opportunities have all but disappeared from the modern stock market. To succeed, today’s deep value investors have adapted Graham’s philosophy, embracing its spirit while pushing beyond its confines. Carlisle examines Graham’s 80-year-old intellectual legacy using modern statistical techniques to offer a penetrating and highly original perspective: That losing stocks—those in crisis, with apparently failing businesses, and uncertain futures—offer unusually favorable investment prospects.
Each chapter tells a different story about a characteristic of deep value investing, seeking to demonstrate a genuinely counterintuitive insight. Through these stories, it explores several ideas demonstrating that deeply undervalued stocks provide an enormous tail wind to investors, generating outsized returns whether they are subject to activist attention or not. It begins with former arbitrageur, and option trader Carl Icahn. An avowed Graham-and-Dodd investor, Icahn understood early the advantage of owning equities as apparently appetizing as poison. He took Benjamin Graham’s investment philosophy and used it to pursue deeply undervalued positions where he could control his own destiny.
As a portfolio, deeply undervalued companies with the conditions in place for activism offer asymmetric, market-beating returns. Modern activists exploit this property by taking large minority stakes these stocks and then agitating for change. What better platform than a well-publicized proxy fight and tender offer to highlight mismanagement and underexploited intrinsic value, and induce either a voluntary restructuring or takeover by a bigger player in the same industry?
Carlisle adds, “Investors aren’t rewarded for picking winners; they’re rewarded for uncovering mispricings – divergences between the price of a security and its intrinsic value. It is mispricings that create market-beating opportunities. And the place to look for mispricings is in disaster, among the unloved, the ignored, the neglected, the shunned, and the feared – the losers. “
Deep Value is a practical guide that reveals little-known valuation metrics that activist investors and other contrarians use to identify attractive, asymmetric investment opportunities with limited downside and enormous upside—undervaluation, large cash holdings, and low payout ratios. These metrics favor companies with so-called lazy balance sheets and hidden or unfulfilled potential due to inappropriate capitalization. Activists target these undervalued, cash-rich companies, seeking to improve the intrinsic value and close the market price discount by reducing excess cash through increased payout ratios. The book analyzes the returns to these metrics, and applies them to two recent, real world examples of activism. The power of these metrics is that they identify good candidates for activist attention, and if no activist emerges to improve the unexploited intrinsic value, other corrective forces act on the market price to generate excellent returns in the meantime.