Jeffrey Smith’s Starboard Value disclosed a new activist position in MedAssets Inc. (NASDAQ:MDAS) in a 13D filing with the Securities and Exchange Commission. Subsequently, Starboard currently owns 5.23 million shares in the healthcare performance improvement company, which represent 8.7% of its outstanding common stock. The hedge fund also sent a letter to the Chairman, CEO, and Board of Directors of MedAssets indicating that the shares of the company are deeply undervalued considering the quality of its assets and the earnings power of MedAssets’ core business.
Starboard Value is an activist hedge fund focused on small-cap companies co-established by Jeffrey Smith in 2002. The New York-based hedge fund primarily invests in underperforming companies and attempts to unlock shareholder value by analyzing and implementing alternative strategies. Starboard Value has added or replaced roughly 115 corporate directors on more than 40 corporate boards since its inception in 2002. The hedge fund has an impressive track record thus far, delivering an annualized return of 22% over the same period. Moreover, Starboard Value’s average return on a 13D filing reaches 28.9%, which provides evidence on why it makes sense to track hedge funds’ activities. Even more to that, when Starboard Value managed to receive a board seat at the companies it has invested in, the fund’s average 13D return reached an even higher figure of 34.3%. According to its most recent 13F filing, Starboard Value manages a relatively concentrated public equity portfolio with a value of $4.81 billion, with the top ten of the fund’s holdings accounting for 84.70% of the value.
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Following activist funds like Starboard is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Starboard can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activist hedge funds have been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 35 months since our small-cap strategy was launched it has returned over 123% and beaten the S&P 500 ETF (SPY) by more than 66 percentage points (read more details). Soon, we’ll be releasing a new quarterly newsletter written by former activist hedge fund analyst Michael Bland that tracks ten or so activist campaigns at any given time.
Jeffrey Smith’s Starboard Value is calling on MedAssets to overhaul its operations and its board. The activist hedge fund has also pinpointed a clearly defined plan to create shareholder value. Some of the steps that should be undertaken by the healthcare company in order to create value include the reduction of operating expenses, improvement of capital allocation, improvement of the company’s corporate governance and examination of all available strategic alternatives. Starboard Value did not only outline the plan for unlocking shareholder value, but it also asked the healthcare performance improvement company to give shareholders greater control, such as the ability to call for special meetings and act by written consent.
