Final HW Starboard Value Activists Prem Kurumoju

Starboard Value, an activist hedge fund led by Jeffrey Smith has stakes in several
companies that are underperforming and the team focus is to create long-term value to
the shareholders.
Before Activists getting into any campaigns (Ex: Starboard), they thoroughly examine and
define the target company (Ex: Darden Restaurants).
Activists create a well-defined strategic plan that aids the shareholders understanding of
the deal and bring shareholders early in the process.
The campaign that interested me amongst others is the Darden Restaurants, which is
believed as an extremely undervalued company by the activists.
While the primary reason a company target is its poor performance, the secondary
reasons are governance and compensation practice. These secondary reasons play a
crucial role in their recommendations to shareholders.
Why/How Starboard targeted Darden Restaurants?
It has been missing expectations of earning over several quarters.
It has great brands like Olive Garden, Longhorn Steakhouse, Yard House, Seasons,
Bahama Breeze and more.
It has valuable assets (be it real estate or franchising)
Above all, it has a tremendous opportunity to improve operating performance and in turn,
improve returns on capital.
Their strategy is to:
1. Create a comprehensive operational improvement plan.
2. A value enhancing strategy for its real estate
3. Adopt a franchising program to accelerate growth both internationally and
domestically, thus improving return on capital substantially.
4. Separation of concepts into a most logical grouping.
It generally starts by accumulating a majority of Darden shares at the right time, which is
when Darden announced to sell or spin off Red Lobster to cut capital expenditures by
$100 million and reduce costs by $60 million annually from another activist pressure
(Barington).
Smith issued a public statement that Darden’s management plan significantly falls of
actions (spun off would not add value) to maximize shareholder value. This statement
spiked the stock price as Smith had a great reputation of shaking many companies like
Office Depot, AOL and more. He has replaced around 80 directors in 30 corporate boards.

Strategic Management, Spring 2019

Final HW Starboard Value Activists Prem Kurumoju

Management response:
When Smith came with a proposal, the management was not in a compromising attitude.
Darden went forward to sell Red Lobster and Goldman Sachs was engaged to foresee
the sales process. Smith was irked with this and wrote a five-page letter stating, “how
terrible the idea of spinning off Red Lobster as its own publicly traded company; instead
asked to put real estate holdings in REIT and to split into two companies” to CEO, Board
and released it to the public.
Management was hell-bent to listen to Smith’s proposal after several requests through
letters and meeting. Smith reached out to several other large shareholders expressing
the potential destruction of shareholder value with Darden’s proposal.
Smith’s multiple trials at various board meetings did not stop the sale of Red Lobster.
Smith increased Starboard’s ownership and readied a conscientious assault with a 20-
page letter to all the shareholders to remove the Darden board depicting all details on
how Red Lobster was sold at a bargained price. Later he had a 300-slide deck on how to
transform Darden restaurants which has details on its turnaround plan for Olive Garden,
Spin-offs, Franchising, Real estate, and operational improvement.
Ultimate Outcome:
October 2014, a landmark was achieved by Starboard value as it ousted the entire board
of Directors at Darden restaurants by winning shareholder support after arguing how
poorly the restaurants are run especially Olive Garden.
Steve Wolosky, an executive at an activist and equity/investment practice at a law firm
says, “Darden campaign was the perfect storm of activism”.
Yes, Starboard proposed a better corporate strategy than that was being pursued by the
management. In Aug 2018, according to Forbes, Darden restaurants have seen the stock
up from $48 to $100 from the time of Board reorg, and an increase of 17% year-to-date,
and 26% during the last year. The three-year average return is 20.8% and the operating
margin is 5.4 percentage points better than the industry average.

References:
William D. Cohan, Dec’14 http://fortune.com/2014/12/03/starboard-capitals-jeff-smith-
activist-investor-darden-restaurants/
https://www.sec.gov/Archives/edgar/data/940944/000092189514002031/ex991dfan14a
06297125_091114.pdf
https://www.forbes.com/sites/jonmarkman/2018/08/07/dig-into-the-surprising-success-
of-darden-restaurants/#2936d6d53b56

Strategic Management, Spring 2019

Final HW Starboard Value Activists Prem Kurumoju

Strategic Management, Spring 2019