Taking to the stage this week in front of an annual gathering of activist investors at New York’s Pierre Hotel, Starboard Value chief executive Jeff Smith was in a hurry to explain his latest bold bet.
After speeding through the hedge fund’s plans for software giant Salesforce and consumer drugmaker Kenvue, Smith flicked to a slide of the double-helix logo of one of America’s most venerable pharmaceutical companies.
“Anybody want to talk about Pfizer?” the 52-year-old asked with a wry smile.
Smith’s presentation to about 400 investors at the 13D Active-Passive conference was meant to be the first Wall Street had heard of Starboard’s $1bn stake in the New York-based drugmaker. But a series of seemingly misfired emails from former Pfizer finance chief Frank D’Amelio, who briefly collaborated with Starboard, had put the company on alert.
The activist investor’s call for a shake-up of Pfizer was initially backed by D’Amelio and ex-CEO Ian Read but within 72 hours the pair had fallen back into line, coming out in support of Pfizer’s chief executive Albert Bourla. Starboard accused Pfizer of foul play.
Smith expressed gratitude to Bourla at the conference for delivering a Covid-19 vaccine that had restored normality, before calmly outlining how Pfizer under his leadership had destroyed at least $20bn in value through a series of misguided acquisitions and research and development bets.
Calling on the 14-person board to “hold management accountable”, he warned: “They can’t follow Einstein’s definition of insanity and continue to do the same thing over and over again and expect a different result.”
Pfizer ranks among Starboard’s biggest and most daring gambles — not least because there are few quick cures for the pharma group’s ills. The $8bn hedge fund’s highest-profile skirmish in the sector, when it took a stake in Bristol Myers Squibb before opposing its $74bn acquisition of Celgene, came to little but still turned a profit for the fund.
An adviser who worked with BMS said Smith’s case against Pfizer — outlined in a 74-page deck — was “far better prosecuted” than its opposition to the Celgene takeover. “I don’t think he’s this guy on a crusade to make Pfizer a better company . . . he has a position in the stock and he wants to make money,” they added.
Smith and Starboard did not respond to requests for comment. Pfizer declined to comment.
Smith has become the face of one of the more divisive corners of finance. The top 50 activist hedge funds controlled more than $156bn in assets by the end of last year, with activists holding stakes in nearly a fifth of S&P 500 companies, yet companies in the sector have a habit of creating enemies of scorned chief executives and board members following bruising proxy fights.
A native of New York’s Long Island, Smith, whose father was a businessman and mother was a real estate broker, had envisioned from a young age a future as an entrepreneur. After graduating from Wharton Business School, he kicked off his career as a Société Générale investment banker but was quickly summoned home to help with a dilemma affecting his father’s company.
Fresh Juice Co was bogged down in a boardroom dispute after acquiring a series of competitors that were granted board seats. To ease the stress on his father, Smith, then 26, engineered a sale to the Saratoga Beverage Group for about $20mn.
He launched Starboard in 2011 alongside two partners, spinning it out of an investment group previously owned by SocGen. Starboard has since targeted 153 companies, including Yahoo, AOL and News Corp, and several other of the biggest names in corporate America.
Smith has served on or advised 17 company boards, chairing four of them. In a seminal 2014 campaign against Darden Restaurants, laid out in a 294-page deck that criticised its Italian dining chain Olive Garden for overspending on breadsticks and for no longer salting its pasta water to extend the warranty on its pots, the activist investor replaced all 12 board members in a proxy fight, a feat never repeated at a Fortune 500 company.
Starboard’s ruthlessness earned Smith the moniker “the most feared man in corporate America” in a 2014 Forbes article but many of the executives who served under him said he had a more deft touch. One of his other early campaigns was against biotech Surmodics.
“Everybody’s fearful of activists because they just don’t understand them,” said Gene Lee, who Smith promoted to Darden chief executive. Lee said Smith was open-minded to how Darden “wasn’t quite as broken as he thought”, and was instrumental to “right[ing] the ship quickly”.
Smith’s playbook is a long way from the more public and hostile crusades waged by other activist investors Carl Icahn and Bill Ackman.
Far from being glued to a Bloomberg terminal, his due diligence on a business is done on the shop floor. After becoming Darden’s chair, he and fellow board members did shifts at Olive Garden restaurants to study the business up close. At outlets of Papa Johns, another company he chaired, Smith learnt how to make pizza.
Marc Benioff, founder and chief executive of Salesforce, fostered an unexpected bond with Smith after Starboard became the first of six activist investors on its shareholder register.
“He’s very sweet, he’s very casual and he’s very insightful,” said Benioff. “I would not mind being an activist myself . . . I wish I had met [Smith] years before, it would have made the business even stronger.”
Similarly, Smith’s respect for D’Amelio grew when they worked across the table from one another when Starboard waged a campaign against health insurer Humana, where the former Pfizer executive was a board member. That led Smith to call D’Amelio when he was considering an investment in Pfizer. D’Amelio then recruited Read.
Losing the support of the two former executives has weakened Starboard’s campaign against Pfizer, but not terminally. Shares in Pfizer jumped 5.6 per cent in the days after Starboard’s stake was revealed but those gains have since evaporated. Pfizer’s market value stood at $162bn on Friday morning, more than 50 per cent down on its pandemic peak.
One executive who fell out with Smith during one of Starboard’s proxy fights said they hoped Bourla would triumph against the hedge fund boss, who was “beneath him in terms of a business stature”, if a proxy fight were to break out.
But another possibility is that Bourla, who met Smith for the first time last week at Pfizer’s New York headquarters, becomes his latest unlikely collaborator.
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