A day at the beach…
Former SEC Chairman Richard C. Breeden may be new to the world of hedge funds and activist investing. But it didn’t take him long to find his sea legs, so to speak. In this letter sent to Campbell Soup (CPB) CEO Douglas Conant, Breeden wastes no time in chastising Conant for his role as chairman of Applebee’s International’s (APPB) compensation committee:
On 29 occasions from from April 2006 through January 2007, Applebees’s corporate aircraft flew into and out of Galveston, Texas, where former CEO Lloyd Hill happens to own a beach house. The nearest Applebees’s restaurant is more than 40 miles away. Though Mr. Hill ceased to be CEO in September 2006, company planes continue the Galveston shuttle."
Ouch. The letter then goes on to say that "most Applebees’s customers would be shocked to find out that a portion of their meal goes to fly the former CEO back and forth to his beach house." But the letter doesn’t just poke at Conant over use of the corporate jet. It also shows declining profit margins, declining same-store-sales and declining ROIC. Breeden’s firm, Breeden Partners, owns about 5.3% of Applebee’s shares, the letter notes. This latest missive was a follow-up to this 13-D filed on December 11 where Breeden proposed nominating four directors to Applebee’s board.
What’s particularly interesting here is that Breeden’s folks dug through flight records to help make its case against the company. After all, the proxy that Applebee’s filed last April only includes the amount that Hill received — $91,333 — and doesn’t provide detail on any flight plans. Just imagine if some other folks started digging into corporate flight logs — now that would make for some interesting proxy reading. In fact, this sounds like a great wiki-project for footnoted.org readers. Anyone interested in helping to pull this together?
RSS
January 30th, 2007 at 7:16 am
Michelle;
I mean no disrespect to Mr. Breeden, but being the ex-chairman of the SEC doesn’t make him an investor.
If Mr. Breeden were all that interested in Applebee’s International, Inc. (Nasdaq: APPB) as an investment, then perhaps he should take the time to ask himself why his hedge fund purchased a company that has short term liabilities that exceeded short term assets.
Another thing that comes to mind would be for his hedge fund to stop relying on research from Merrill Lynch a company in competition for investment banking dollars.
Knowing that Merrill Lynch has numerous investment banking relationships, Mr. Breeden still uses their information in his letter, information which also listed other restaurant chains, and nowhere in his letter did I find anything stating that he had taken the time to determine which of the companies listed, IF ANY and including Applebee’s, had an investment banking relationship with Merrill Lynch.
I found it curious that Mr. Breeden highlighted Applebee’s falling ROIC. I mean wasn’t it falling before his company made the investment? Oops.
Of course the most obvious thing I didn’t find mentioned in his letter, was, based on his company’s research or any other company’s research, what the value of Applebee’s BEFORE his company bought it?
At the end of the day, 99.99 out of 100 folks are going to miss the obvious when it comes to investing, and over the long haul the vast majority of those folks are going to end up with less than when they started. So here’s a tip that perhaps Mr. Breeden might find useful in the future. PRICE DETERMINES RETURN. Determine what a stock is actually worth BEFORE your hedge fund buys it.
Applebee’s is currently trading in the high $24s. To my mind it’s only worth $23-$26. If Mr. Breeden paid in that range, (I got tired of reading so I have no clue what he paid), then what is he complaining about? He got exactly what he paid for.
I also think it bears mentioning that Mr. Breeden manages a hedge fund, the least investment business least regulated by the SEC.
So once the smoke clears and the dust settles what’s left? The simple fact that being the ex-chairman of the SEC qualifies Mr. Breeden to be exactly what he is, the ex-chairman of the SEC.
Wax
January 30th, 2007 at 9:55 am
Using the website indicated above — and provided that one knows the FAA-issed tail number of any plane utilizing an instrument flight plan (e.g., all jet aircraft) — one can trace fairly easily the history of an airplane’s travels throughout the U.S. and beyond.
January 30th, 2007 at 11:30 am
Wax, you appear to be missing the obvious point in favor of disparaging Breeden. Certainly Breeden has his idiosyncrasies as an investor, and if his rationale is based entirely on a Merrill report as you imply, that is pretty weak research on his part. The rest of your diatribe including your opinion that Applebee’s is worth $23 to $26 and if Breeden paid that then he got what it is worth (a point which also includes your admission that you did not even read Breeden’s letter), and implying that Breeden is not even sophisticated enough to check the price of the stock before he invests in it, appears entirely opinion based itself and is at least not entirely relevant.
Fact is, Breeden likely believes that Applebee’s is worth more than what he paid for it. An investor is able to suggest ways in which to improve the value of the company he owns, and since Breeden owns about 5% of it, he will also be heeded by the board (perhaps even also by management). So, if Breeden invests in a company that is underperforming then takes action to improve the situation at the company, it is difficult to understand your criticism that he is neither a savvy investor nor a credible source of guidance.
You seem pretty torn that a former SEC chairman is giving advice based on bank research and that hedge funds are lightly regulated… So what? If you do have some evidence to appease Breeden’s concerns, for example that the former CEO was not in fact flying around on the company dime, please do share.
Truly,
Wax missed the point.
January 31st, 2007 at 6:29 am
Truly;
My basic point was this, “Financial Fine Print”. If you have not read it, I hope you will, it encapsulates many of the underlying reasons which were the basis for the comments I made.
If you consider the context with which I made my comments, while you may not agree with them, I think you will see that slighting Mr. Breeden was not my intent.
Here is an individual complaining to the Applebee’s compensation committee chairman about what I can only infer, are perceived misuses of company assets. This individual highlights many other issues in his letter.
The sense that I took away from reading the letter was that if the company would stop flying in and out of Galveston, all of the other things he cited would either not be happening or would go away.
But this is not just any individual making these comments, nor is it only the past chairman of the SEC. The person making these comments is a person that graduated from Stanford, has a law degree from Harvard, is a partner at Baker Botts in Houston, a very powerful legal firm. This person has served as Assistant to the President of the United States, and has been chairman of Coopers and Lybrand (now PriceWaterhouseCoopers) a huge accounting firm. This person is more than imminently qualified to understand a financial statement and it’s accompanying footnotes.
Yet, as I read through Mr. Breeden’s litany of complaints, I began to realize that all of the things Mr. Breeden was citing, the declining ROIC, the declining profit margins, the declining same store sales, etc. were things that were absolutely nothing new. These were things that I must assume were known since the day Mr. Breeden’s hedge fund bought shares of Applebee’s.
Here was a person with a resume of such quality as to be almost unbelievable, complaining to a committee chairman about things that, had his company done just a little bit of research, they would have known about before they invested in the Applebee’s.
And to top it all off, I got the extreme sense that Mr. Breeden had not taken the time to determine what he thought a reasonable value for the company was. My impression was that price was unimportant, and yet here he was complaining about the price of the stock.
I’m sorry but I just found all of that to be the ultimate irony. If you felt I was disparaging Mr. Breeden, then I sincerely apologize, as that was not my intent.
Being an investor is part of what I do. I spent a long time learning about investing in the late 70’s and early 80’s and I spent a very very short time in the late 90’s forgetting everything I learned.
My resume is less impressive than a paw prints in a child’s sandbox. I have been self-employed, I have been bankrupt, I have been poorer than you can possibly imagine.
Yet not once, in good times or bad, have I ever denied that all of the good and all of the bad were the direct result of the choices made by the owner of the face that looks in the mirror every morning when I shave.
Many times it was not pleasant, nor easy, to admit I had made a poor choice. But admit it is what I did. I learned from the bad choices and I learned from good choices, and I moved on. I didn’t complain, and I didn’t whine and cry. I simply made a promise to myself to do better, which is something I believe Mr. Breeden should do.
And that…was entirely the point of my post.
Wax
February 14th, 2007 at 9:59 am
[...] Michelle Leder reported recently on her Web site footnoted.org that the standards of corporate governance weren't exactly best practice. The company's [...]