Paul Singer on Elliott Management Corporation

Well, that's counterfactual because I'm not the one making that call. But I'm the looming presence; it's Elliott. Seriously, what's the rap on activist investors? You focus on quarterly earnings, trying to jack up the share price for the short term. What's wrong with that criticism? Well, I think that's a very broad brush way of describing what we do. I can't speak for activists in general, but I can tell you what we do and why. We try to make money all the time. For the first 10 or so years of our firm's existence, we were close to 40 years old, convertible hedging and relative value arbitrage was our strategy on low leverage to try not to lose money. We built activities to create value and add a manual component as a risk-limiting technique. Distressed investing, activist mergers, merger arbitrage, and activist equity investing are natural evolutions for Elliott. We've been in activist equity for about 12 years, built a team on the East Coast and West Coast in Silicon Valley. We have the capital to engage in our projects and get done what we need to get done. The answer to your first question is interesting because we believe in the layered application of our work. With close to $30 billion under capital, when that phone call comes in from Jesse Cohen or somebody else on our team, at least somebody knows there's a firm that has the ability to back its assertions and goals. We don't just show up; we spend a lot of time figuring situations out, developing our views about which situations are interesting to us.

There are... most companies in this space start with a great product, get some traction, and then there's a sudden inflection point where growth stops. The dividing line is the companies that make solid transitions to building on their success, adding products and services with adjacencies, proper M&A. Companies like Amazon, the profit may not be there but the platform is fantastic. But other companies, when that inflection point happens, engage in ill-chosen M&A, improper directions in capital structure and leverage.

Shareholder return is one metric, but when you see inadequate R&D in core products, M&A oriented toward 'we're making a billion dollars a year, what are we going to do?', it misdeploys engineers and corporate infrastructure toward projects that don't work out. The luxury we have is that there's a negative selection when we look for interesting situations: undermanaged companies in strategy, growth, organization, R&D, M&A. We see the ones that don't make the transition. When they make the transition, growth is maintained, stock prices are maintained. The valuation is such that you can't see a path toward restoration of growth or augmentation of value. It leaps off the page. Our suggestions are usually not purely structural, like spin this off and everything will be fine.

Well, Citrix is a current situation. It's a very interesting company, a tremendous core product in virtualization. It has been for a long time and is still a very sticky, excellent product. What were they doing wrong? When the product stopped growing, they didn't have the capability or didn't execute on proper M&A and R&D. They made a series of acquisitions. You can't form a solid opinion on the first acquisition that doesn't go well, but when a company does 10 or 15 acquisitions with a consistent record of destroying value, you say, why are they doing this? For example, they bought Bite Mobile and burned $450 million to the ground in a short period. The signs are usually pretty clear. You look at the board of directors and accountability. Citrix is interesting because it's the only one where we actually put one of our people on the board. Frequently we ask to add to the board or replace members. This was the first where we have Jesse Cohen on the board. We thought it was important to be part of the situation and the search for solutions. We were part of the path toward replacing the CEO, who had been there for a very long time. The new CEO has been at the company for nine months, and we're very excited by the possibility of creating more value. In that case, the core product had been suffering not just stagnation but declining revenues for the last couple of quarters, and we're hopeful that the revenues in the core product have grown. Every situation is different. We think that by having an expertise that has been growing, the team and ability to pursue each stage has been growing. We approach a company privately and quietly in almost every case. The discussion is, here's the work we've done, let's talk about it. Sometimes we're wrong. It's a layered approach. When something gets contentious or worse, we don't go to war. We didn't go to war with Argentina.

Well, the first thing that needs to be said is that these were two very different situations. Samsung C&T roughly a year ago, I call that one passive activism. We didn't take an activist position; we took a position in securities of Samsung C&T because of our belief of what the company was likely to do in terms of restructuring that everyone saw was in the cards due to family dynamics. The founder had been in a hospital in a coma. Everyone knew there needed to be restructuring. We took that position, and then they announced a restructuring that we thought was unfair. So we fought back, we lost narrowly, but we think we turned out to be right. In that situation, foreign ownership of C&T was about 34%. Samsung Electronics is a very different situation. There we were and are proactive. Foreign ownership is about 60%. We are not intending to be adversarial. We have made suggestions, not demands, that we think the company either is planning to do or should be doing given their goals. Suggestions about bringing its capital structure, which we think is underleveraged and not in accordance with global standards, a lot of excess liquidity on the balance sheet. Board of directors: we think there's an imbalance compared to global standards of executive and non-executive directors. We want to expand the board. Among the outside independent directors, I believe there are no tech experts. That's a sign that it's not shareholders' directors setting the strategy. The problems they've had with the Galaxy Note 7, is that in any way a vindication of your concerns? First of all, Samsung's approach to our approach has been so far constructive in the same tone as ours. Have you spoken directly with Jay Y. Lee? I have not, I don't think my team actually has. Our involvement in Samsung Electronics, our research and forming the opinion, was way before the Galaxy 7 problem broke, and our going public was after the first recall but before killing the product. It's one of those idiosyncratic things. We think and have said publicly that Samsung is a tremendously adept company. We are confident in their basic value and their ability to solve their problems. This situation does not shake our belief that there is a potentially very value-creative overall solution to these other things that transcend this singular problem.

We have not had direct conversations with them, but the public back and forth has been constructive. I wouldn't be able to talk about it, but I do believe there haven't been direct conversations yet. But they haven't rejected outright your critique of the capital structure or board membership. You're suggesting there's been some constructive public response at least. Among other reasons, I believe not just the tone and the authoritativeness of our research, but as I said, these things are things that many people feel have been in the works, should be done, maybe are being contemplated but maybe not in the time frame we're suggesting. So we're optimistic about that one. We think it's a tremendous platform with tremendous value.

Today, of course it's possible. There are people starting tiny little friends and family funds, as Elliott was at the beginning. There are challenges now to achieving scale. Anybody starting now, when I started with 1.3 million, I was primitive, all by myself in a primitive set of markets. Convertible bonds, 25 and 50 bonds, meaning 25% of $50,000 was a good trade, $100,000 was a big trade. Markets have grown, capital in the hedge fund industry has grown. So I wouldn't discourage anyone with a good idea from starting a private investment firm with a very small amount of money and a great idea.

Well, it's easy to extrapolate today's trends in ETFs and index funds with an increasing proportion of capital devoted to passive strategies would lead you to think that. But it's a double-edged sword. We believe in a balance of power. There's a fallacy of composition. Indexing or passive strategies cutting fees to zero has some theoretical and practical merit because studies have shown it's hard to outperform the markets. But the lower the proportion of capital managed by people actually doing the work, the greater the disparities between value and price, and so there is more opportunity for those who are paying attention or doing the work to create value. In the sphere of activism, I believe in a balance of power. There's a whole industry devoted to saying long-termism is valuable and short-termism is bad. The fact of the matter is that Elliott's holding period for activist positions is just shy of two years. The average institutional equity holding period is 1.5 years. So this struggle is between managements who can sit for 10, 20 years or more with losing strategies, and activists. There are activist strategies that are destructive and short-termist, but we think the things we've done have added to stakeholder value broadly, certainly shareholder value. We think the balance of power is hard by passive investing, but it opens up more opportunities.