A Look Into Jeff Smith, John Paulson & Two Other Investors’ Latest Moves

The hedge fund industry recovered some losses incurred in the first two months of 2016 during March, which marked one of the best months for the industry in two years. Approximately 70% of the global hedge fund industry posted gains in March, with the average hedge fund gaining 2.3%. The somewhat promising performance was mostly driven by long-short equity and event driven strategies, thanks to the strong rally in equities on a global basis. However, the smart money industry has yet to prove that it deserves the hefty 2-and-20 fee structure. Leaving this discussion aside, the following article will examine four informative SEC filings submitted by several hedge funds tracked by Insider Monkey at the end of the previous week.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

In a proxy statement filed with the SEC on Friday, Jeffrey Smith’s Starboard Value L.P. disclosed a letter sent to Depomed Inc. (NASDAQ:DEPO)’s President and Chief Executive Officer Jim Schoeneck and the company’s Board, which says that Depomed is “deeply undervalued” and that there are major opportunities to create shareholder value. Let us remind you that the New York-based hedge fund disclosed economic exposure to 5.97 million shares (4.14 million shares of common stock, as well as additional exposure in the form of cash-settled total return swap agreements) of the specialty pharmaceutical company last week, representing 9.8% of the company’s total number of outstanding shares.

The letter revealed that Mr. Smith and his team have major concerns over “serious corporate governance deficiencies, questionable capital allocation decisions, and egregious actions taken by the Board to stymie strategic interest in acquiring Depomed”. Mr. Smith’s Starboard primarily discussed two broad topics in the letter: the Board’s proposal to change Depomed Inc. (NASDAQ:DEPO)’s state of incorporation from California to Delaware, which is said to suppress shareholders’ rights; and the “shareholder-unfriendly steps” undertaken to hamper Horizon Pharma PLC (NASDAQ:HZNP)’s efforts to acquire the company. In July 2015, Depomed received an unsolicited offer from Horizon to acquire the former in an all-stock transaction for $29.25 per share, which denoted a 42% premium at the time, but Depomed’s Board adopted bylaw amendments and implemented a poison pill “designed to make it as difficult and time-consuming as possible for shareholders to potentially have a say on Horizon’s offer at a special meeting”. Long story short, Starboard Value believes that there are opportunities to unlock or create shareholder value at Depomed, some of which would require to improve capital deployment, rationalize research and development, as well as explore a possible sale of the company given possible operating, financial, and tax synergies. All in all, the New York-based activist hedge fund anticipates that Depomed’s management and Board will “halt their pattern of aggressive entrenchment behavior and take no action to further frustrate shareholders’ rights”. Last but not least, Starboard recommends the company not to pursue any acquisitions considering its levered capital structure and expensive debt. The hedge fund sentiment towards Depomed dropped notably during the December quarter, with the number of funds (among those we follow) invested in the company shrinking to 23 from 32 quarter-on-quarter. Richard Mashaal’s Rima Senvest Management owns 4.13 million shares of Depomed Inc. (NASDAQ:DEPO) as of December 31.

The upcoming pages of this article will discuss three separate filings submitted with the SEC.