It usually starts with behind-the-scenes discussion. Then, a letter or announcement explaining the investor’s demands is made public. Stock prices see a bump. Change ensues. And the firm walks away with millions, or even billions, in profit.
That’s how Elliott Management Corporation does business — and it almost always gets its way.
AT&T, eBay, Cabela’s, SAP, utility company NRG Energy and even the country of Argentina have all been shaken by Elliott’s influence.
Now, local utility Evergy Inc. could be next.
Elliott Management Corporation, a New York-based hedge fund with a minority share investment in the utility, claimed in a public letter late last month that Evergy’s stock has underperformed since the company’s 2018 merger and that the utility is undervalued.
Elliott practices what experts call “shareholder activism.” Activist shareholders are known for leveraging their investments in publicly traded companies to push for what they see as the companies’ best paths forward — paths that seem to have shareholders’ monetary interests at heart.
Elliott, founded in 1977 by billionaire Paul Singer, has leveraged its investments to push for change in dozens of companies over the years. Sometimes that change involves new, investor-approved appointees to a company’s board of directors. Sometimes it means an ousted CEO, new management-level leadership or implementing a “high-performance” plan. It can even mean a company pursues a stock-for-stock merger or acquisition, at shareholders’ persuasion.
Elliott owns the economic interest equivalent of 11.3 million shares of Evergy, the hedge fund disclosed in its letter to Evergy’s board of directors. Those shares make up about 5% of Evergy’s stock.
While 5% may not seem like much, Elliott owned about the same amount of stock in NRG Energy — a utility with headquarters in Houston and Princeton, N.J. — when Elliott teamed up with a fellow investor to urge the power company to make corporate changes in 2017.
Elliott also has worked with less.
In October, AT&T avoided a protracted fight with Elliott six weeks after the activist investor disclosed it had acquired a 1% stake in the company. AT&T said it agreed to a three-year strategy and gave Elliott input on the selection of two board directors. That same week, Marathon Petroleum Corporation’s CEO agreed to step down and spin off its Speedway gas station chain after receiving pressure from Elliott, which had announced a 2.5% stake in the business.
In November, Elliott and another hedge fund activist pushed eBay to sell its StubHub franchise after Elliott announced in a letter the previous January that it had a $1.4 billion stake — more than 4% — in eBay. StubHub sold for $4.05 billion after eBay had purchased the company for $310 million in 2017.
Jeff Gramm, a hedge fund manager and author of the book “Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism,” says an investor’s stake in a company isn't the only determinant when it comes to leveraging one’s investment.
“If you’re Elliott, it really is about if things ultimately head to a proxy fight,” Gramm said. “Higher ownership helps, but it’s not that material. To win, they need to get the support of all of these other voting shareholders.”
Harvard Business School professor Suraj Srinivasan, who teaches classes on shareholder activism, says Elliott has likely already communicated with fellow Evergy shareholders.
“In many cases, when something like this happens, they have probably already talked to some of the other investors, who are large investors in the stock, to try to see whether their ideas resonate with the larger group,” Srinivasan said. “Because think about it — they’re 5%. There’s 95% out there. A 5% percent owner really can’t do much unless a substantial portion of others will actually support them.”
Elliott has a track record of garnering such support, solidifying itself as one of the top names in shareholder activism.
An international asset management firm, Lazard, noted in its 2019 Annual Review of Shareholder Activism that Elliott Management and Starboard Value, another American hedge fund, accounted for more than 10% of activism worldwide last year.
Elliott launched campaigns against 14 companies in 2019. Evergy is one of its first public campaigns of 2020.
Echoes of NRG
The 2017 timeline of events between NRG and Elliott seems to mimic what is now happening between Elliott and Evergy.
According to widespread national reporting on the NRG/Elliott situation, Elliott and a fellow investor announced in January 2017 that the pair had amassed a combined 9.4% stake in NRG. They used that stake to push for change within NRG, claiming the company’s stock was “deeply undervalued.”
Similarly, Elliott’s January 2020 letter addressed to Evergy’s board of directors states the hedge fund believes “Evergy’s valuation does not properly reflect the value of its collection of high-quality regulated utilities.”
Srinivasan said an investor usually goes public with suggestions for improving a company’s value after private negotiations between the company and the investor have failed. Elliott revealed in its letter last month that Evergy management had been engaged in dialogue with Elliott for three months prior to the letter’s release.
In Elliott’s letter, senior portfolio manager Jeff Rosenbaum asserted that to improve Evergy’s value the utility should consider pursuing one of two options — developing a “high-performance plan” under the direction of new leadership (either on the company’s board of directors or at the management level) or considering a stock-for-stock merger that would allow Evergy’s new “partner” to oversee the implementation of a high-performance plan.
“The way they frame it is like a merger,” Gramm said, “but I think what that practically means is they would want them to merge with another utility and the other utility would kind of have the management. That’s essentially a sale.”
Srinivasan said it is likely Elliott and Evergy are continuing with behind-the-scenes negotiations before making another public move. That move could take place soon, as the deadline to submit nominations for Evergy’s board of directors is March 6.
In the case of NRG, Elliott and its fellow activist investor lobbied for two appointments to the utility’s board of directors, which they secured in February 2017. Those new board members were then involved in a review of the utility company and helped craft a “transformation plan,” which was launched in July 2017. When the plan was announced, NRG’s stock surged almost 25%, CNBC reported, resulting in a more than $70 million profit on the day for Elliott.
NRG’s stock value has continued to top 2017 levels, but in the company’s annual earnings report for 2017, the utility disclosed it suffered a net loss of $1.5 million that year. The Houston Chronicle also reported that NRG’s workforce shrunk by about 3,000 people in 2017.
According to filings with the U.S. Securities and Exchange Commission, Elliott reported holding more than 18 million shares of NRG stock during the first financial quarter of 2017 — the period in which Elliott announced its stake and lobbied for board seats.
Elliott’s investment into targeted companies doesn’t appear to be long term. For example, during the second quarter of 2017, prior to the announcement of NRG’s transformation plan, Elliott’s shares increased to 19.6 million, worth more than $300 million at the time. After the bump in stock valuation that resulted from the announcement of the transformation plan, SEC filings show Elliott’s share of NRG stock dropped. By the end of that year, Elliott reported holding 10 million shares. In 2018, Elliott did not report any NRG holdings, meaning it held less than $100 million in the stock.
But Gramm isn’t quick to classify Elliott as simply a firm chasing short-term stock bumps.
“You have to keep in mind — for them to have credibility with voting shareholders at the next company that they engage with, they can’t just come in here, say lots of things that get the stock to pop and then blow out of it,” Gramm said. “For them to have enough of a reputation to get support from the Vanguard and the BlackRocks of the world, they need to prove that they can create value for those other shareholders. And to most shareholders, that’s long-term value.”
Curtis Sneden, president of the Greater Topeka Chamber of Commerce, said Elliott is a group that needs to be taken seriously. Sneden said he and others at the chamber were concerned by the proposals Elliott put forth in its January letter.
“They’ve got a track record which is not admirable from the standpoint of the communities that they’ve impacted,” Sneden said. “We read their commentary with a little bit of skepticism and some concerns for our friends at Evergy.”
Sneden said he considers Evergy to be among Topeka’s “premier corporate citizens.”
The utility contributed $441 million in taxes last year to the Kansas economy, according to data provided by Gina Penzig, Evergy’s manager of external communications. She said Evergy also accounted for $4.6 million in community contributions in 2019, including employee giving and company match campaigns, charitable contributions through the company’s foundation, and dues paid to the chamber of commerce and local economic development organizations.
Sneden says he doesn’t see either of Elliott’s proposals having a positive impact on the communities Evergy serves.
The merger that Elliott urged Evergy to consider could de-localize leadership.
“Their many employees are our friends and neighbors,” Sneden said. “So any proposal that would potentially have the effect of moving the management elsewhere or moving substantial portions of the operations elsewhere are of deep concern to us.”
The other option Elliott suggested — the development of a “high-performance plan” under the direction of new leadership — could result in the appointment of new board members or management-level officials.
“I think that’s the heart of our concern,” Sneden said. “The current management of Evergy are people that we know and we trust, and we trust that they understand their accountability to the regulators, to their shareholders, to the consumers and to our communities — and we feel lucky to have them at the helm.”
During private negotiations, Elliott and Evergy could come to an agreement on the best path forward. If not, tensions could end in a proxy fight — a shareholder-led battle for control of the company.
“That has happened very few times with Elliott,” Gramm said, “because companies, I think, are often pretty quick to settle with them because their tactics can be pretty aggressive.”
But Sneden struggles to see a good way out.
“Proposals like the ones that have been put forth,” Sneden said, “are couched as sort of a dual option. I think we look at it from a little higher, less-technical level that it’s about this outside group forcing its way in and making decisions that don’t put the local stakeholders at the forefront.”