Forbes Coal (now Buffalo Coal) operations in Dundee, South Africa. Buffalo Coal is one of Aberdeen International Inc’s portfolio investment companies.Supplied
San Francisco-based activist Ryan Morris boarded a red-eye flight back to the United States Monday night with little to declare, after his messy two month battle to oust directors of struggling Aberdeen International Inc. ended in failure.
How did Mr. Morris so badly miscalculate support for his campaign against Aberdeen's generous payments and loans to insiders and affiliates of its chairman, Stan Bharti?
One answer is that the 29-year-old activist overestimated shareholder support for his dissident slate of directors. The other explanation is he misunderstood how to tailor the mud-slinging U.S. activist playbook to the conservative Canadian marketplace.
Either way, his missteps are a cautionary tale reminding activists that successful proxy battles cannot be won without a clear understanding of the local market and shareholder sentiment.
When Mr. Morris first set his sights last fall on Aberdeen, he was convinced he had a winning campaign to replace all of the Toronto company's seven directors. His investment fund Meson Capital owns a 4-per-cent stake in Aberdeen and his campaign e was backed by British fund manager Nightscape Capital (UK) LLP, which owns 5 per cent.
The rest of his support, Mr. Morris explained , would come from Aberdeen's broad base of retail investors.
"I was wrong about the shareholder base," Mr. Morris said in an interview. "They had a lot more loyalists than I anticipated."
Shortly after the activist began questioning a private sale of Aberdeen stock last fall, shareholders voted with their feet by selling millions of company shares to willing buyers, who apparently supported the incumbent directors.
Since late October, nearly 17 million, or about 20 per cent, of Aberdeen's shares changed hands, a huge leap from the 6.8 million shares traded the previous three months. Another 10 per cent of the company's stock was sold almost entirely to insiders and affiliates through a private placement. Add another 17 per cent of Aberdeen shares owned by Mr. Bharti and three other directors, according to the company's 2014 information circular, and the shareholder math did not add up for a successful proxy battle.
Compare Mr. Morris's approach with that of Bill Ackman, the New York activist investor who initially wanted to replace two of Canadian Pacific Railway's 16 directors in 2011 and eventually won shareholder support to replace six incumbent directors.
Mr. Ackman had three advantages Mr. Morris lacked. His hedge fund, Pershing Square, had enough capital to bet more than $1-billion to acquire a 14-per-cent stake in CP. The railway's shareholder base was dominated by institutional shareholders, which made it easy for Mr. Ackman to gauge support for change. Finally, CP's board and management remained mute as Mr. Ackman slammed the company's strategy and lacklustre performance.
Mr. Morris, by comparison, had millions of dollars to spend, not billions, and a very limited track record. He had a shaky reading of Aberdeen's shareholder base. Instead of attacking the company's performance and track record, he muddied the water by slamming Mr. Bharti's character. Aberdeen responded with a series of noisy and personal attacks that, at times, seemed cartoonish.
Emotion, not rational investment strategies, dominated the Aberdeen proxy war.
When Mr. Bharti sat down with the activist on Monday, he was holding all the cards.
In a corner, Mr. Morris said he approved an unusual settlement that called for him to withdraw his proxy fight and apologize to Mr. Bharti. In exchange, Mr. Morris said Aberdeen agreed to pay for about half of all his expenses related to the proxy fight.
The terms, Mr. Morris said, were the "least risky" solution. A day after the settlement was announced, Aberdeen's stock fell to its lowest level in five weeks.