sign in sign up
<<
Home , Activist shareholder

Graham & Doddsville An investment newsletter from the students of Columbia Business School

Inside this issue: Issue XXI Spring 2014 CSIMA Philippe Jabre—Following the Steps to Conference P. 3 Investment Success Philippe Jabre P. 4 Arnold Van Den Berg Philippe Jabre ’82 is the founder and Chief Investment Officer of Jabre Capital Partners, which runs three investment funds – a & Jim Brilliant P. 12 multi-strategy fund and two long-only funds. Prior to launching Pershing Square his own firm in February 2007, he was a top money manager at GLG Partners. Jabre Capital Partners recently won Finalist Pitches P. 22 Philippe Jabre (Continued on page 4) Eric Rosenfeld P. 32 Women in Investing P .37 Century —The Value of Discipline H. Kevin Byun P. 38 Arnold Van Den Berg founded Century Moon Lee Prize P. 45 Management in 1974. He is a principal of the firm, the Chief Executive Officer, co-Chief Editors Investment Officer, and a portfolio manager. Chris Brigham Arnold has no formal college education but gained his market knowledge through rigorous MBA 2014 self-study, tremendous dedication, and over 45

Jackson Thies years of industry experience. Prior to starting Century Management, he worked as a financial MBA 2014 Arnold Van Jim Jason Yang Den Berg (Continued on page 12) Brilliant MBA 2014

Matt Ford Eric Rosenfeld—The H. Kevin Byun—Special MBA 2015 Evolution of an Activist Situations Investing

Peter Pan Eric Rosenfeld is the H. Kevin Byun ’07 MBA 2015 President and Chief founded Denali Executive Officer of Investors in 2007. Crescendo Partners, a The firm employs Visit us at: an opportunistic www.grahamanddodd.com New York based www.csima.org investment firm special situations focused on activist and value oriented investing. Prior to framework. Denali forming Crescendo in seeks to identify 1998, he held the catalyst-driven Eric Rosenfeld position of Managing situations that will H. Kevin Byun Director at CIBC Oppenheimer and its unlock value. He predecessor company Oppenheimer & was a triple major at Rice University Co., Inc. for fourteen years. and has an MBA from Columbia Busi- ness School. (Continued on page 32) (Continued on page 38) Page 2 Welcome to Graham & Doddsville

We are pleased to bring you Eric Rosenfeld shares his With this being our final the 21st edition of Graham & evolution as an activist in- issue as editors of Graham & Doddsville. This student-led vestor and how his firm, Doddsville, we want to investment publication of Crescendo Partners, identi- reflect for a moment on our Columbia Business School is fies potential investments. time shepherding this publi- co-sponsored by the Heil- Eric also delves into cation. It has been a privi- brunn Center for Graham & Canadian laws and how they lege to act as stewards of Dodd Investing and the Co- facilitate the legacy of value investing lumbia Student Investment . at CBS and to share the Management Association insights of such talented (CSIMA). H. Kevin Byun discusses investors with our readers. the nuances of special situa- These interviews will be Heilbrunn Center Director Louisa Serene Schneider For this issue we spoke with tions investing and how he among our fondest memo- ’06. Louisa skillfully leads five unique investors cover- searches for opportunity in ries at Columbia Business the Heilbrunn Center, culti- ing a range of different per- spin-offs, liquidations and School. We leave Graham & vating strong relationships spectives and investment transformative M&A actions. Doddsville in the highly capa- with some of the world’s styles. He also discusses some of ble hands of Matt Ford and most experienced value the opportunities he sees in Peter Pan. Apparently we investors and creating nu- Philippe Jabre recounts the market today. have to grow up now, but merous learning opportuni- how he began his career in we look forward to reading ties for students interested convertible and This issue also contains pic- the interviews they conduct in value investing. The clas- th ses sponsored by the Heil- how his firm, Jabre Capital tures from the 17 annual in future issues. We are brunn Center are among Partners, searches the world CSIMA Conference, which deeply grateful to those th the most heavily demanded for attractive investments. took place on February 7 investors we interviewed and highly rated classes at at Columbia University, fea- during our tenure – none of Columbia Business School. Arnold Van Den Berg turing and Joel this would be possible with- and Jim Brilliant emphasize Greenblatt as keynote out their willingness to the value of discipline in speakers. share their wisdom. Finally, investment management, and we thank you, dear reader, explain the importance of Lastly, this issue includes the for your continued interest, building a framework and finalist pitches from the Per- loyalty, and suggestions. mental database around your shing Square Challenge experiences to improve deci- which took place on April - G&Dsville Editors sion making. 23rd.

Professor Bruce Green- wald. The Heilbrunn Center sponsors the Value Invest- ing Program, a rigorous academic curriculum for particularly committed students that is taught by some of the industry’s best practitioners.

Julia Kimyagarov, Louisa Serene The first-place team and judges at the 2014 Schneider ’06, and Marci Zimmerman at Pershing Square Challenge the 2014 Moon Lee Prize Competition IssueVolume XXI I, Issue 2 Page 3

2014 CSIMA Conference at Columbia Business School

The audience listens as Bill Ackman answers student Student conference coordinators Joe Fleury ’14, Taylor questions with a mix of candor and humor. Davis ’14 and Ivan Dias ’14 deliver opening remarks.

Kyle Bass (L) of Hayman Capital speaks on the Best Mark Cooper moderates the Behavioral Investing Panel with Ideas Panel with Tom Gayner (R) of Markel William von Mueffling ’95, James Montier, Michael Mauboussin . and Kent Daniel.

Bruce Greenwald moderates a discussion with Joel Greenblatt. Bill Ackman discusses his GSE investments. Page 4 Philippe Jabre

(Continued from page 1) G&D: When you were at when they start school. I EuroHedge’s Columbia, were there any don’t even know if there Management Firm of professors who were was an investment club the Year award for 2013. particularly influential for when I was at Columbia in Mr. Jabre received an you? Or any courses that 1980. Maybe there was...I MBA from Columbia stood out in your mind? had no clue. Business School in 1982 and serves on the Board G&D: And when you Philippe Jabre of Overseers. graduated, where did you start your career? Graham & Doddsville (G&D): Can you start by PJ: I joined JPMorgan in talking about how you New York for an internship became interested in “Today, students in asset management for investing? nine months. And that was are much more very useful because it was Philippe Jabre (PJ): I was my first contact with the at Columbia Business School prepared and real world of managing from 1980-82 and part of equities, bonds, convertible the interest came from focused when they bonds, and warrants. classes I was taking in start school. I don’t international investments. I Then, after the nine months, was also reading a lot of even know if there I went to Paris to work for books which helped me a bank named BAII, which grow into it. Of course you was an investment later became a subsidiary of don't know at age 20 or 22 BNP. It was still in the very that you're going to be club when I was at early days for investments. successful, but gradually it In those days, the stock evolved into what I'm doing Columbia in 1980.” market would open and now. have only one quotation a day. So I was in Paris G&D: And were you managing money for investing before Columbia? international clients while the whole French domestic PJ: I did invest. I lost my market was not allowed to shirt. I borrowed money PJ: In the first two invest offshore. Those were and told my investors I'd semesters, you don't know the early days in 1983. share in both losses and all the classes that exist. Things have progressed a profits. It's not like And by the last two lot. funds today where profits semesters, you try to catch are for the manager and up as much as you can. G&D: You started in losses are for the client. It There was a guy named – how cost me a fortune. So when Francis Finlay, an Englishman would you say convertibles I left Columbia Business who was teaching investing has changed since School, I had lots of debt. investments. Professor when you started in the But for me, the lesson Adler had a course on 1980s? behind it was important. It international trade. I was was a steep learning curve. fascinated by anything linked PJ: In the early 1980s, My time at Columbia to international investments. people used to value Business School was a great converts as a substitute for learning experience in how Today, students are much stocks. Now people value you can maximize your more prepared and focused (Continued on page 5) losses. IssueVolume XXI I, Issue 2 Page 5

Philippe Jabre

(Continued from page 4) of event driven, emerging what are our expectations. them on implied volatility markets, foreign exchange, compared to historical and fixed income. Then I'm I think the real game today volatility and there is more running two long funds or becomes optionality. Where of a credit markets aspect funds where we can make money is on to it. In the earlier days, we I buy cheap stocks or the increase in volatility if used to have broker loan convertibles. So the same the stock has sharp moves rebates. If you put your trades that I do in the hedge up or down. One needs to shorts and longs with them, fund, I can do in the long take a view. If you take no they would give you a funds but I just don’t hedge view, you make no money. credit. So let's say the two them. year treasury was at 6%, G&D: How was it moving they would give you 6% plus from convertibles into the coupon on the bonds equities and other types of less the on the investments? stock (if any). So we were looking at convertible PJ: Convertibles are made arbitrage with a 3-5% of four variables. On the positive carry on the trade. fixed income side, it's made Converts were excessively “One needs to take of credit and the interest cheap at the time. They rate. So one needs to know priced in very little value for a view. If you take what is happening there on optionality and didn’t the macro side. And on the accurately price the no view, you make equity side, it's made up of potential for the stock to an option on an underlying explode or to collapse. no money.” stock. So basically when you Black Scholes was very good look at convertible bonds, at pricing -term you have to be familiar with options—three or six or what's happening with nine months. It was not interest rates, credit good at all for 3-5 year spreads of your underlying optionality because you had instruments, the valuation of a different set of data. And the stock, and the value of so, for ten years, it was a The reason why I have the optionality. very profitable environment those three products is to invest in. Today you have because I always look for At times, the first two convertible bonds coming the catalyst. If you fully variables, interest rates and with 0-1% coupons and hedge a convertible bond by credit, get their days of already pricing in large hedging the credit, selling glory like in 2008 or 2011 implied volatility. The the stock, and locking in the when interest rates were market is just much more implied volatility, you make under pressure and credit efficient. no money if you have a spreads exploded. But in hedge. So people like myself eight years out of ten, all G&D: How would you look for catalysts on you need to worry about is describe your investment stocks – earnings, events, your stock valuation. Today, philosophy? positive or negative companies have a lot of cash surprises. This is why and interest rates are at PJ: I’m currently running I've developed long-only zero, so there is nothing to three funds. One is a multi- expertise. It brings hedge there. The real hedge strategy fund which has a additional layers of is on the equity part. So convertible arb portion, a information on why a stock over the years we long-short equity portion, should go up or down and (Continued on page 6) and then a smaller section Page 6 Philippe Jabre

(Continued from page 5) concept that you learn with Today, you don't have that. developed knowledge on time. Banks don’t really provide the equity side. That's how that platform anymore. So we became investors in to develop that track stocks. record, you might go to a long-only manager, which is G&D: Can you talk about “Before you start a a very different world. Or deciding to start Jabre you would need to go to a Capital? you hedge fund, spend 6-7 years doing analysis, and then PJ: Before you start a have to follow the manage a pool of capital as hedge fund you have to part of a larger hedge fund. follow the right steps. I right steps. I always always tell people it's the Ten or fifteen years ago, same as if you are a doctor, tell people it is the you might need $20-40 architect, or lawyer opening same as if you are a million to cover the costs of a practice. I first joined a starting a hedge fund. bank, then after ten years I doctor, architect, or Today, that number is joined Lehman Brothers. probably closer to $100 Then, with a group of four lawyer opening a million because regulations partners, we spun off from and controls are much Lehman Brothers and practice...You more intense and, as a created GLG. And then result, you need a lot of after that, I created my own follow the steps so people just for compliance. fund. You follow the steps people will follow So it’s become much so people will follow you. harder, which is good for you.” funds that already exist I remember after business because the barriers of school I wanted to create entry are getting even my own fund at age 25. My higher. We can maintain a father told me if you want higher because banks to lose money, go lose don't really speculate money at other people's G&D: What are the anymore, many hedge funds expense. You can't become challenges for someone who have closed down over the a fund manager unless might want to start their past five or six years, and you’ve lost a lot of money own fund today? there are very few and survived. So JabCap was newcomers. So whoever a normal evolution when I PJ: It's getting much harder has survived in our industry started it seven years ago. A for a number of reasons. is able to develop high lot of clients followed First, banks used to be a margins, at least on stocks. because I had a very good platform where you would If you look at fixed-income track record at my prior get exposure to a variety of or at algorithmic traders, funds over the previous areas. So you could do the performances are much fifteen years and that made capital markets, M&A, you lower because there is a it easier. But you need a could be a trader or an huge amount of money track record and you need arbitrageur. It used to be there. Most became too big to have clients. The barriers like a school. And then the and the market doesn't give to entry are very high today brightest would have their them the same and what people look for is own book and then after a opportunities. So it's a a track record and the few years with a track rotation and, for the experience of managing record they could set up moment, it is much harder money unsupervised. And their own fund. (Continued on page 7) that's a very difficult IssueVolume XXI I, Issue 2 Page 7

Philippe Jabre

(Continued from page 6) There's always something people asked me if we were for young people to create a happening or an area in investing in Russia. I told hedge fund. I think people which the market is not them the fund had no need to have at least 8-12 focusing enough attention. emerging markets exposure years of experience, so This presents interesting and no intention to add any. maybe by age 37-40 you opportunities, and our They asked what it would start to think about setting agility can help us take to change my mind. I Students talk with Bill Ack- up your own fund. But it outperform because in the said if you have a collapse in man at the 2014 Pershing takes time and it’s much bigger investment valuation, then we will jump. Square Challenge. harder than before. management firms, they Several weeks ago there have fund managers was a collapse so I went and G&D: Can you talk about specialized by area. They bought Russia. I put 10% of how the Jabre Capital team have a value guy, a growth the fund there. Colleagues is organized? guy, a mid-cap guy, or a guy who cover emerging who only does oil and gas. It markets said you’re crazy. PJ: I have an investment is hard for these guys to be But I said why? I told you I team of 15-17 people up to speed on all areas. would invest when things working with me out of a Things slip, and this is where collapse. They have fund with about 50 people. I a hedge fund can be a bit collapsed. There are names have analysts looking after faster – faster to recognize, that trade around 3x P/E. certain geographies – one faster to buy, faster to sell, They said yes but everyone looking at Asia and Japan, faster to understand. I think is selling. I said it is already two looking at Europe, and that's what we do. in the price, just give it time. one focused on the US. You can’t invest based on Then I have product news stories of what specialists. So I have a credit Obama and Putin discuss on person, and a person who their phone calls. You need trades converts and a something based on research specialist for valuation and you need to converts. Then I have an “A hedge fund can forget about the noise. event-driven team with a specialist in , a be a bit faster – A second example would be specialist in emerging our Japan investments. In markets, and a series of faster to recognize, November 2012, I was traders for the US, Europe, invited by a bank to make a and Asia. These traders and faster to buy, faster presentation in Japan for specialists bring interesting institutional investors. Two situations to my attention to sell, faster to weeks after my visit, the or to the attention of the understand.” parliament was dissolved other fund managers. By and there was talk of a new organizing this way, and government. I’ve followed covering different strategies Japan over a long period of and products worldwide, we time so I knew what the have great flexibility. implications of that might Sometimes we buy value be, and thanks to that stocks, other times we buy experience, I immediately growth stocks. Last year, for G&D: Can you walk us went overweight a market example, we bought a lot of through a past investment where I previously had no Chinese internet stocks and that you think illustrates exposure. Japan was thought gambling stocks in Macau. your investment approach? of as a market that was These investments were going nowhere in those quite new in our portfolios. PJ: Earlier in the year, (Continued on page 8)

Page 8 Philippe Jabre

(Continued from page 7) made 50% net of fees. The down 10% every month. For days. In December 2012, main thing was to have eight months in a row, we our equity book was up 10% Japan and Europe going had volatile moves up or because I was quite early from an underweight to a down. So you either had the compared to others in market-weight position feeling that the market was understanding the changing during an extraordinary going to collapse or that the dynamic in Japan. And that period. So you have to market was going to go up. positioning worked out very recognize you are in that The S&P finished flat on the well in 2013. type of extraordinary period year but it cost most active and deploy money ahead of fund managers money Another example: in 2009, others. because of the volatility. everyone hated banks in America. But I heard the But in addition to that, I had CEO of Citigroup and the exposure to mining and CEO of JP Morgan talk in inflation-protection stocks Q1 2009 about how their in 2011. That cost the fund banks were making money, a lot of money because all not losing it. And that was the industrial materials, the biggest signal to buy US mining, and gold stocks banks that I ever saw. We “The key thing is to really struggled. It was one bought a lot of them in the of those periods where you US and we finished the year find things that had to experience your up 80%. stock going to zero before have done nothing it bounced back. A similar thing happened in for ages and Europe. Last June, European Even though we will banks were trading at suddenly there is an implement a stop-loss when 60% of book value and we have a bad investment, suddenly the ECB came in event that you need 2011 became the worst very strongly to support time to stop-loss you could them. And so we bought a to be the first to think of because we would lot of ETFs on the European stop-loss an investment and financials and they ultimately understand or the market would go right went up 60% or so. appreciate how back up. But in 2008 when we did stop-loss, the equity Having the cash, having the things will change.” fund finished up for the year openness of mind, not being because after I lost 10%, I caught with bad invest- went out of the market in ments – all of that was the equity funds. Then I important. bought bonds the last three months and the fund So the key thing is to find finished up 2%. So as much things that have done as that model of stopping nothing for ages and your losses works in suddenly there is an event G&D: Can you talk about extraordinary periods, it can that you need to be the first any investments that didn't hurt you a lot when the to understand or appreciate. work as well or where you market is going through And this is where you have learned from a mistake? erratic moves but with no a huge opportunity to definitive trend. And so the outperform. Last year, our PJ: In 2011, I had a very conclusion is that when you equity fund, which is difficult year because the start to lose money, you unlevered and has a market was going up and (Continued on page 9) maximum exposure of 130, IssueVolume XXI I, Issue 2 Page 9

Philippe Jabre

(Continued from page 8) very disciplined. If we go period we ever had because should get smaller and trade through a period where we had the cash and less, because you can’t catch we’re down 10% in a stock, investors behind us. the market properly. we're very disciplined about cutting exposure because Take that strategy we Over the past 15-18 there's something wrong followed compared to value months, it's been a much that we don’t understand. funds which got very badly easier market because every hurt in 2008 because cheap dip was an opportunity to stocks got cheaper, and buy. So one could increase some even went bankrupt. Scott Ostfeld ’02 of Jana leverage and create great A lot of value funds got Partners speaks at the performance. All of this was decimated by sticking to 2014 CSIMA conference. exactly the opposite of their model of buying cheap 2011. The lesson is that you stocks like Bear Stearns, need to identify the cycle Lehman Brothers, or and the trend and try to Countrywide. So it was a apply the right investment very difficult period and the strategy according to the “The world is full of thing that helped was the trends. stop-loss. investors that miss G&D: Aside from stop- But now we're okay, there's losses how do you think the big move no more systemic risk in the about risk management, because they market where we face position sizing, and the extraordinary dangers. amount of cash that you overreacted to hold? G&D: Would you rather headline news or to hire someone who has a PJ: The big difference trading type of background between someone that short-term profits.” or a traditional asset comes from asset management type of management and someone background? who comes from a trading environment in a bank is the PJ: Asset management. An sizing of the portfolio. I have asset manager will survive met so many traders who cycles provided they have a put too much weight on good trader behind them to some ideas and if the idea protect them. I think finding doesn't work, they find a good manager who themselves either stopping The combination of these understands valuation is them lower down or not constraints helps us survive much more valuable than generating any return difficult periods and gives us finding a good trader because they missed the the cash to take advantage because over the years, more interesting ideas. of better periods. I took a that’s how you avoid buying Since I come from a more stop-loss in my long fund in too early and selling too traditional investment the summer of 2008 and early. The world is full of management background, moved money into fixed investors that miss the big we're more diversified and income bonds. And in early move because they have very strict limits on 2009, the equity market overreacted to headline how long or how stabilized and we had the news or to short-term overweight we want to be cash to buy cheap banks and profits. in some situations when we cheap growth stocks. It was find great, cheap the most extraordinary (Continued on page 10) opportunities. And we're Page 10 Philippe Jabre

(Continued from page 9) AIG goes from 28 to 50 in a period to buy and hold In 2013, for example, fund straight line in a year. When compared to that period. managers of my generation that happens, you feel stupid The challenge now is to buy were able to make 40-60% if you buy it at 28 and sell it the right stock, because if type returns, because we at 35. But you need you bought a Cisco or Intel had a price target for what experience to avoid making or an IBM, you went that mistake. nowhere. So you have to identify the right stock, the So I think what you need is right sector, and the right a good fundamental fund growth story so that you manager and an excellent don't waste your money on trader. You need both to underperforming names. “The challenge now have experience because the market is continuously G&D: What metrics do you is to buy the right repeating and the key is to focus on when evaluating figure out what type of stocks? stock, because if period we are in and where we are in it. That's the most PJ: First, you have to look you bought a Cisco important challenge. at the macro because if you or Intel or an IBM, buy a great stock in a G&D: You mentioned the horrible environment, you you went nowhere. cycle. What is your typical make no money. For time horizon for example, Japan has the right So you have to investments? environment right now because you have central identify the right PJ: Since the macro bank monetary stimulus and situation stabilized in June a weakening of the yen. So stock, the right 2012 when the ECB decided you need to have a macro sector, and the right to do whatever it takes to view which will help you stabilize the euro, we develop a micro view. What growth story so that moved from a risk-on/risk- we do is look sector by off macro environment sector and analyze which you don't waste where correlation was very sectors to focus on and high to a stock-picking which ones to avoid based your money on environment where on where we are in the correlation is very low. In cycle and the macro underperforming the period before, it was backdrop. names.” very hard because the market was not reacting to Then each sector will have a fundamental valuation. It different metric. If you want was reacting to the possible to buy financials, you’ll want breakup of the euro, to to understand Tier 1 capital sovereign downgrades, to ratios and price-to-book the shutdown of the US metrics. If you look at real we owned and would stick government, to a possible estate, you need to to it. The younger crisis in China. It was more understand cap rates, price generation of managers, on of a macro, high-correlation to NAV, and trends in real the other hand, would tend market. So it was very hard estate. If you look at export to realize their investments to hold on to stocks before. companies, you need to much faster, making 10- But since June 2012, people understand foreign currency 15% and then moving on. like us who pick stocks have exposure. So they will all be But doing that, you miss the had a much smoother (Continued on page 11) big move when a stock like IssueVolume XXI I, Issue 2 Page 11

Philippe Jabre

(Continued from page 10) you have any parting words have to avoid being too different and you have to of advice? scared to make the jump know which ones matter for when the time is right. So a given sector. you need to have a very cool head and take advice. G&D: Are there other Look around you – what are current ideas you think are the right steps to create interesting? your own best path? I think a lot of people suffer from PJ: Oh yes, you should buy leaping too early or too late Japan. Nobody believes the “People have to into an area in which they government can sustain want to work. their current policies, so the make sure that market puts a very small My advice is: work really premium on the success of they're not ahead hard but don't be in a rush their policy. Even the to create your own hedge Japanese themselves do not of their own fund. A hedge fund is like trust the government to finishing school. You first sustain it. If they keep on experience and need to go to university to trying, we could have the then have to avoid get practice, to get training, Nikkei going to 16,000- to lose money at someone 18,000 with the Yen at 110 being too scared to else's expense, to develop to the dollar. A lot of your own expertise, to reforms that might happen, make the jump develop a track record, and like corporate tax cuts, then if you're still interested labor liberalization, or when the time is and motivated, you can try pension funds redirecting to think how to start your investment into stocks, right.” own fund. could very easily help the equity market there G&D: Excellent. Thank you continue to do well. for taking the time to speak Another one is China. with us, Mr. Jabre. There are a lot of macro funds that are short Chinese shares. But if the Chinese authorities stimulate, we PJ: If people want to join could see the Chinese the hedge fund world, they market up another 10%. need to really develop skills A hedge fund has the and these skills should be capacity to look ahead. We developed within large could be wrong but if we're organizations. They right, we can make a lot. If shouldn't be in a rush. I'm wrong on Japan, I think Things happen when they we’ll see the Nikkei go from should occur. If I had 14,000 to 13,000. But if I'm started my own hedge fund right and they implement in 1996 instead of 2006, I these reforms, I see it going would not have had the from 14,000 to 18,000. So same success. So people it's all a risk-reward have to make sure that situation. they're not ahead of their own experience and then G&D: Before we end, do Page 12 Arnold Van Den Berg & Jim Brilliant

(Continued from page 1) wrong. I was reading and first stock I ever bought was advisor/consultant for researching and one day Commonwealth Edison Capital Securities and something caught my eye when I was 15 years old. John Hancock . that changed my whole way of thinking. As I was Jim Brilliant has been reviewing the companies “One day with Century and the people who did well Management for 27 and who did poorly in this something caught years and is a principal market, I noticed that some Arnold Van Den of the firm, the co-Chief of the better performing my eye that Investment Officer, Berg firms and better performing changed my whole Chief Financial Officer, money managers all had a and a portfolio manager. connection with Benjamin way of Jim is a member of the Graham’s investment Century Management approach. I thought, "Geez, I thinking...the better Advisory Committee. wonder what this Jim attended Pierce philosophy is all about?" performing firms College where he I started studying and studied Finance. eventually met a gentleman and better

named Mark Franklin who performing money Graham & Doddsville became a mentor to me, (G&D): Can you each tell and he was a big Graham managers all had a us about your introduction fan. After I felt that I to investing and how you understood the philosophy, connection with first became interested? I studied everything I could get my hands on. I decided Benjamin Graham’s Arnold Van Den Berg that rather than depend on (AVDB): My introduction mutual funds, I would start investment to investing began when I my own investment firm. approach.” was working for a financial That was how I got involved firm, and they were selling in the investment field and it insurance and mutual funds. eventually led me to start I got very excited about the Century Management. I made money on it and that mutual funds, as the market turned me in the direction was doing really well in late Jim Brilliant (JB): My first of businesses, and '68 and early '69. I thought introduction to investing understanding that my that after all of my travels I was when I was a teenager. intellectual power is far had finally found the field Every Sunday my dad would more profitable than my Jim Brilliant that I'd like to devote my pull the stock tables out of labor power. I made more life to. I started getting the newspaper, and his money on that stock than I people, mostly friends of simple method was to chart did cutting grass. It certainly mine and friends of people I the stock prices, tracking opened my mind to the knew, involved in mutual the trading range of that importance of expanding the funds. stock from high to low over mind and using that as the time. At that time, I was way to wealth. Just about the time I got shoveling snow and cutting going, stocks and mutual grass and had kind of a G&D: Can you talk a bit funds went into a bear neighborhood business about the founding of market from 1969-74. I was where I'd saved some Century Management and very, very distraught. By '72 money. I decided, "Well, why you started it? and '73, I was doing a lot of that looks pretty good. Let soul searching about what me try my hand at it." The (Continued on page 13) was going on and what went IssueVolume XXI I, Issue 2 Page 13

Arnold Van Den Berg & Jim Brilliant

(Continued from page 12) down. While the management? Then we have AVDB: I was able to get a environment eventually a strict quantitative good grasp of the value created tremendous approach as well. The most philosophy, but the problem opportunities, the sentiment important thing is to identify was I didn't have any was extremely negative. the potential pitfalls – what credentials or formal You had 12-15% inflation, are the flaws? How low can education. I didn't have any you had a market that this stock go if things don't money either, but I did have dropped 45%, and you had work out? a dream. I was sitting with small cap stocks that one of my clients and I told dropped 75%. Everybody G&D: Do you think him about my dream of was bearish. People didn't starting my own investment even want to talk about the company. I was working out because they of my studio apartment at had been burned so badly. “The most the time, and he said, "Oh My thought was that either Arnie, you can't do this out the world was going to end, important thing in of your apartment. You've and a lot of people thought the market, as in got to get an office. You've it would, or I was going to got to get a business going." make a lot of money. People almost any I said, "The problem is I are always predicting the don't have much money." end of the world, but the endeavor, is only things that end are the Anyway, a long story short, people; the world keeps discipline.” after lunch he offered to going. That was the founding help me get my business of Century Management. going, rent an office and buy some furniture. It was about G&D: How has Century discipline is teachable or is it $2,500 at the time; in evolved over time? Are something the people you today's money that's about there particular processes hire inherently have? $17,000. I decided I'd go out you have implemented that and I'd get an office and you think lead to better AVDB: Oh no! I think start my business. I do not results for clients? discipline is very teachable. recommend that people If you don't learn it by start that way. That's the AVDB: I think the most yourself the market will way I did it, but I didn't have important thing in the teach it to you, but you will much choice other than to market, as in almost any learn it one way or another. continue selling products, endeavor, is discipline. It is It's kind of like what one of and I didn't want to do that. one of the things I learned my favorite authors, James It was many years of as an athlete when I was Allen, said, "You either learn struggling, of building a young, and I became very by wisdom and knowledge, clientele, of developing a good at it. Remaining or by suffering and woe, and reputation and track record. disciplined is something that you continue to suffer until I started in September of we try really hard to do in you learn." 1974 and the market this business. bottomed three months G&D: Moving on to your later, which gave me a boost One of the things we've investment philosophy, you with the few clients I had. tried hard to implement mentioned Ben Graham, here is that when we're you just mentioned both the That six year bear market looking at a company, we qualitative and quantitative leading into 1974 was just look at the qualitative risk. aspects of companies. How torture. Every day we How good is the business? would you characterize would come in and the How good is the (Continued on page 14) market would just grind Page 14 Arnold Van Den Berg & Jim Brilliant

(Continued from page 13) the reasons why studying have a stock that has a your investment philosophy? history is so important. worst case of $8 and a sell point of $20, if it were a JB: We have three primary Arnold kind of mentioned small cap stock, we'd want a tenets to our investment this in terms of discipline, minimum of a 5:1 reward to philosophy. The first one we that expertise in any field is risk. So in that case, we can call recognizing and largely driven by a mental we can only pay $10 to buy First-place winner Patrick capitalizing on value gaps. database of experiences and the stock. If it were a big Stadelhofer ’14 with Paul That's really just finding Orlin and John Friedland ’97 patterns that are recognized cap stock, then we're at the 2014 Moon Lee Prize companies where the price by having lived through looking for a 3.5:1 reward- Competition. of the stock is disconnected different environments. To to-risk ratio. These can be from the underlying value of us, studying history is really slightly adjusted based on the business. You're important. We go back industry and the nature of probably familiar with Ben through 20 years of the the stock. Once we’ve done Graham's quote, that in the company's history, or as far this, we take all of our short run the market's a back as we can get the data. stocks and put them into a voting machine and in the We look at all aspects of dashboard, which is just our long run it's a weighing the business and we want to master Excel worksheet machine. To us, what he understand its drivers, what that has all the valuations. was really describing was makes it tick. In particular, Then we sort by reward-to- how the prices of stocks we break down the risk, and this is what really often get disconnected from company to see how each drives the framework for their underlying value due segment performs during our portfolio. Sorting to volatility in the market. the entire business cycle through that reward-to-risk We are searching for and how the market will helps us make our buy and opportunities where that price that company during sell decisions and portfolio- price disconnect occurs. these extreme events, weighting decisions. either during extreme The other part of our downturns or extreme G&D: Are there particular investment philosophy, as upturns. investors that have helped Arnold mentioned, is that all form tenets of your of our valuation is anchored At the end of all this, we put investing philosophy, besides on what we call a worst together what we call our Ben Graham? case analysis. The idea is valuation structure, where that we handicap what we we have a worst case price AVDB: There are lots of think the company's stock is based on the company being investors like Graham and going to sell for during in extreme duress. Then we Buffett and people of that times of extreme duress. look at a sell point, and that nature, most of them you've The duress could be a is where we forecast a full heard of. There's one that I recession, it could be an cycle recovery in earnings learned a great deal from, industry problem, or it and multiples, and derive and pardon me for could be a company our sales price based on mentioning his name in a problem, but focusing on that. And finally we want a value-focused newsletter, that worst case analysis margin of safety. That but that was T. Rowe Price. helps us identify what we margin of safety is what He taught me three things think is the proper margin drives our buy point. We'll that are really important. of safety. What we have buy the stock based on a He was a growth stock found over the years by margin of safety and we use investor, kind of like Phil doing this is that companies a reward-to-risk ratio to Fisher. He was big on the and industries tend to have determine that. qualitative aspects and he repeatable patterns, in really made me stop and terms of valuations, through By way of example, if we (Continued on page 15) a cycle. That is also one of IssueVolume XXI I, Issue 2 Page 15

Arnold Van Den Berg & Jim Brilliant

(Continued from page 14) still associated with the seen multiple market cycles. think about the value of a business. Did that frame of reference business beyond the normal help you in 2008 and 2009 financial metrics. T. Rowe The third thing that I and how does it frame your Price is an investor that is learned from him was the thinking now? underappreciated in my value of having incredible opinion, and I think anybody flexibility. He was a premier AVDB: I think the main who's interested in this field growth stock investor, and lesson you get from being in ought to study his life and in 1969, he decided that his different markets, and his philosophy, because growth stocks were over- markets that go down quite there are tremendous valued, as was the rest of a bit like the 1974 bear lessons to be learned. the market. In addition, the market and the 2008-9 bear government was printing market, is that when stocks money to provide the social go down 40% or 50%, some programs that were way or another, as a whole, “Expertise in any established in the 1965 stocks always come back. field is largely Great Society initiative, so Everybody who starts out in he completely changed his this business knows that, driven by a mental point of view. He opened up but until you go through the New Era Fund that one of these markets and database of consisted of the antithesis of you see things fall apart and the stocks he always then come back, you don't experiences and followed. He bought gold have total faith when you're and silver stocks, oil stocks, going through it that it will patterns that are cyclical and basic materials come back the next time recognized by stocks, and real estate, around. because he felt that inflation having lived was coming. This proved to By going through these be a very good call, given markets, it's given me through the the environment, and he complete faith in America provided a great return and the American markets, different during difficult times. because when you look at That was a very big lesson how low stocks get in these environments. To and that really helped me bear markets and you see us, studying history during the 1970s when I got how quickly they recover started. In my early years once things clear, you is really we bought Swiss francs and develop confidence that claims on Swiss reserves. It when you have something important.” was illegal to own gold at you believe is of value, you the time but you could buy stick with it. You don't sell collectibles (which I don’t and if you have the cash, The second thing I learned normally recommend), so you buy more. That from him is that he really we bought British confidence helps you to regretted selling his sovereigns as they were navigate through these business. His regret selling at a small premium to cycles and helps you sell influenced me to make the gold bullion. This helped us stocks, like we've done this decision that I would never a lot during the early '70s past year, and build up cash sell Century Management, when inflation rose. knowing that another cycle because when you sell, you will come and you will be lose control over the way G&D: That leads to our able to redeploy the cash the investment philosophy next question. You founded when the bargains appear. and business are managed, Century in 1974 and have (Continued on page 16) even though your name is Page 16 Arnold Van Den Berg & Jim Brilliant

(Continued from page 15) that was so disruptive - did source of ideas. We Right now, out of four that change the way you certainly talk to other hundred stocks, we only think about worst case investors and share ideas have ten, maybe twelve analysis or is it viewed as an that way. One of the areas ideas that we could buy aberration, a once in a that I find to be the most today. We know this is not lifetime type of market? fruitful is identifying themes. a good time to be very That's because if you can aggressive and we're AVDB: No, I think that the identify a theme, you can Louisa Serene Schneider ’06 building cash. 2009 market was very much leverage your research. addresses the audience at the 2014 CSIMA conference. like the 1974 market. It Instead of one idea at a came a little quicker, but I time, a theme allows you to think that the 1974 bear pick up five to ten ideas. “We look for things market was even worse because it lasted over six We look for industries that like regulatory years. Just to give you an are undergoing some example, the 2007-09 bear dramatic improvements in changes, policy market went from an 18x their end markets that may changes, or multiple to about a 10x not yet be realized in their multiple. The 1974 bear price. To get to those, we demographic changes market went from an 18.9x look for things like multiple to an 8x multiple. regulatory changes, policy … We find that often The median P/E for the changes, or demographic provides ripe areas average stock in the Value changes. Probably the most Line® composite of 1,700 prolific is technological for further companies went to a 4x-6x change, and I don't mean investigation and a multiple. I still consider the the PC change, but changes 1974 bear market the in an industry due to way to develop toughest one because it different kinds of technology dragged out for six years. being used. We find that themes.” Not that a down market of often provides ripe areas for a year and a half to two further investigation and a years is short; it is long way to develop themes. For That kind of anchors your when you're living through example, in the energy philosophy about what is it, but it's not as long as six industry, we've all heard value. I think our 5:1 re- years. about the well publicized ward-to-risk ratio on the fracking techniques utilized small cap stocks came out G&D: How do you typically in onshore oil and gas of going through these look for new ideas? You drilling. While fracking has cycles and realizing that our mentioned earlier that you been around for decades, it buy point probably shouldn’t keep a spreadsheet of the is the combination of be much more than 15-20% companies you are tracking fracking and the relatively above our worst case. That and their reward-to-risk. newer advanced drilling has worked for us for many Will you also use screens technologies such as long- years. During our first 30 and other methods of lateral horizontal drilling, years we only had one sourcing ideas? and directional drilling that down year, a loss of 9%, and has led to the tremendous averaged more than 15% JB: We run a lot of screens. increase in the amount of during that time. We subscribe to Value natural gas and oil produced Line®, which covers several in the United States. G&D: Did 2008-2009 thousand companies over influence the way you think the course of a year. We G&D: With markets up about your worst case find that to be a great (Continued on page 17) analysis? It was a market IssueVolume XXI I, Issue 2 Page 17

Arnold Van Den Berg & Jim Brilliant

(Continued from page 16) implication for the chemical construction firm, and in my significantly in 2013, are industry, because in the US, view one of the best run there specific areas you we use natural gas to companies in the business. think have become produce ethylene, which is I'm not recommending that overheated or still find the primary/basic anybody buy it right now, relatively attractive? And component for most value- but we see this being a five- within that are there any added chemicals. A few to seven-year cycle. The specific investment ideas years back, we saw this stock is around $63 now, you would be willing to when we observed natural and should it sell off into the share? gas prices declining rapidly. mid-$40s, we'd certainly be One of the things we look buying more of it. JB: As Arnold has at are structural shifts, so mentioned, it is hard to find when a new technology Another company that is value in the market today. comes in, we look to see if somewhat related is Orion And it's hard to find cheap it is going to impact an Marine (ORN). They're a stocks across an entire industry structurally. The marine construction industry, so it's more of an production of natural gas company that specializes in individual stock-picking became prolific and prices heavy construction projects market at this point and it's fell dramatically, so we were that are around water. tough to find good values. looking at those companies They're very big in the Gulf We obviously keep digging that stood to benefit from Coast, the Pacific for them and we try to look cheap natural gas and, of Northwest, and the for those themes that we course, those that were Caribbean. They do marine think are mispriced. In going to get harmed. Some construction and dredging. particular, some of the areas getting harmed were coal It's a heavy construction where we think there's companies, because natural business and coming out of opportunity right now are in gas became very 2008-9, the industry was sectors of the energy competitive from a cost peaking from the previous market. Basic materials standpoint. The chemical construction cycle. Their names have been beaten up, industry is one area in revenues, backlogs, and so we're finding some value particular that would benefit profits were declining and there and also in some areas because of lower input competition got very of insurance. I think we've costs. difficult. Bidding became all heard recently about the very competitive, so their biotech industry and how We recognized that and earnings collapsed. It that's gone crazy. We have believed there would be showed up for us on a no circle of confidence in significant share gains by US tangible book value screen biotech, so that doesn't chemical companies, which that we run, but it also affect us. would require capital showed up in two other spending. Well, it's coming ways: one was our chemical One theme we previously to fruition, as there's about theme, and the other was mentioned is natural gas. $70-100 billion dollars that's our Panama Canal We believe the US is going to be spent over the expansion theme. It kind of developing some very next five years. We bought gives you an idea how we significant competitive a fair amount of these try to triangulate different advantages in different companies that we believe things based on cheapness areas, and one is the energy are going to benefit from and themes we're looking market. That is evident with this capital spending binge. at. the increased production One of my favorites in that both in oil and natural gas. industry is Jacobs They're widening the Engineering (JEC). They're Panama Canal, which On the natural gas side, that an engineering and (Continued on page 18) has a particularly positive Page 18 Arnold Van Den Berg & Jim Brilliant

(Continued from page 17) $800 gold. We've done justify that they're right. It's requires deeper and wider what we believe is a really the down and dirty ports in the United States thorough analysis on gold value guys that are buying to be able to accept bigger and gold mining companies, some of these stocks at the ships. The project has been which Arnold summarized bottom. What we often find somewhat delayed by in two articles he and the is the longer the cycle, and government budget issues, team wrote on this subject. the more that the earnings but it looks like the Army We sent these write-ups to grow throughout the cycle, Corps of Engineers will start our clients back in February the more that multiples to release some projects and March but they are still start expanding and you pretty soon. Additionally, available on our website at begin to attract growth most of the chemical plants www.centman.com if you investors. Typically, by the around the Gulf Coast will would like to read them. time those guys are in, require marine we're out. construction. Orion Marine We're not big buyers of is in the very beginning gold miners right now and G&D: How do you think stages of this and it's we're not buyers of gold about position sizing? If you starting to have a positive itself. But we watch the have a buy target and a sell impact on their backlog and companies individually target, is the position sizing revenues. The stock has run because there are some that a sliding scale between lately and is at roughly $13, are nearing our buy points those two ends? or about 40% above our buy again. point. I wouldn't buy here, JB: We're an all-cap but at lower prices, we'd G&D: Some of the ideas manager, so we'll buy across certainly add to that you mentioned play on the market cap spectrum. position. Our target on that themes that develop over The smaller the company is, stock is about $20. multiple years. How long do the more cognizant we are you typically hold a about our ownership G&D: Any others you position? percentage relative to float would be willing to discuss? and the amount of average JB: Our average holding daily trading volume. So JB: As you know, over the period is usually three years, we're very aware of that last couple of years, gold but it depends on a couple when we're taking our went from roughly $700 to of things. One is the overall positions. A position $1,800 and then back down market environment. typically ranges between 1% to $1,200. Well, even more Second is how quickly the and 5% of the portfolio, than the decline of gold theme is recognized in the depending on cap size, prices, the gold miners went stock price. As you know, quantitative and qualitative down dramatically. Gold stock prices discount the factors, as well as valuation. went down roughly 34% and future, so while the theme you had gold miners, may be a five to seven year Let's say we want ABC depending on their market theme, the stock may Company to represent 3% cap, down 50-85% from discount it three or four of the portfolio. We may their recent peak. Back in years out. start out buying an initial December, we saw a lot of position of 1% or 1.5% at value in the gold miners so At the bottom of the cycle, our buy point with the idea we bought a basket of a lot of these companies are this will leave us room to miners that was diversified very lumpy in terms of their dollar cost average into the both geographically and by business orders and backlog. position if the price declines market capitalization. In our Many investors want the and gets closer to our view, the gold miners at the rosy picture and the worst case scenario. end of the year were comfort of the crowd to (Continued on page 19) discounting roughly $700 to IssueVolume XXI I, Issue 2 Page 19

Arnold Van Den Berg & Jim Brilliant

(Continued from page 18) linked and asset-driven problem right now, but over Sometimes it gets there, businesses tend to be priced the long run it has a sometimes it doesn't, but on asset values and so tendency to straighten out this has an influence on our tangible book is our favorite because of the rules put in total position size. Then as valuation metric for these place by the founding the stock appreciates, we companies. However, at the fathers and because it's a review every company at top of the cycle, the same democracy. fair value for a potential sale companies tend to trade or trim. The things that will based on earnings, EBITDA, Just to give you an example, Second-place winner Akhil Subramanian ’14 with Paul influence whether we're and sales metrics. For less I checked the flow of funds Orlin and John Friedland ’97 going to sell or trim is the cyclical, steady cash flow from the Federal Reserve power of the thesis, how at the 2014 Moon Lee Prize generating companies, we and found that foreign Competition. strong the company is in its focus on free cash flow and investors probably have industry, and if the company earnings based metrics, as more money invested in is performing within our book value doesn’t tend to America right now than at stated theme and be as important. almost any time in history. expectations. What that shows you is G&D: There's no shortage irrespective of the It will vary by company and of people who think the US problems, if you compare it will vary by market cap — is facing headwinds but you the US to the rest of the the smaller the market cap, seem to have a pretty world, there really aren’t the more we have to sell in optimistic view. What drives many other places you advance. There are many your optimism and does it would go to invest. There factors that go into it, but affect how you think about may be better pricing, there ideally we are able to get your investments? may be better our maximum position and opportunities, but as far as a then somewhere between AVDB: There are some big place to invest, and a place our designated fair value and problems, no question to live, and a place to do sell point, we begin to exit about it. But, what people business, even with all its so that by our final sell point lose sight of is the fact that apparent shortcomings, I we're at zero. first of all, the US is a still believe the US is the democracy. It has private best place. You know what G&D: Are there certain ownership of assets and it they say in real estate: valuation metrics that you has no currency location, location, location. pay the most attention to restrictions. It has the Well, America is probably when you're evaluating your highest level of technology; the greatest location. In worst case scenario and fair we're the leader in 3-D addition, and this is very value scenarios? printing, hydraulic fracturing, important, we have one of robotics, and the best militaries. When JB: We look at enterprise nanotechnology. We have you apply some of the value-to-sales, price-to-cash the largest, most diversified technological advances our flow, price-to-book, and flexible capital markets military has incorporated, I EBITDA, and P/E ratios. We in the world. You almost personally believe it is the look at the entire host of have to be a foreigner to best. Just two years ago standard metrics. What we appreciate what this country they landed a plane that was find is that depending on the has over most other piloted by a robot on an company or the industry, countries. You realize that aircraft carrier. This really different metrics are more what foreign investors are gives you an appreciation important than others really looking for is the for our tremendous military during different times of the stability of the country and a power and capabilities. cycle. For example, at the sound political system. The bottom of the cycle, the political system is a bit of a (Continued on page 20) more cyclical, commodity- Page 20 Arnold Van Den Berg & Jim Brilliant

(Continued from page 19) seeing the imbalances not predicting this will While most people in developing in this country. occur, but it is a potential America don't consider that We talked about the outcome we have to a big plus, if you lived markets, we talked about consider. It’s a long way anywhere else in the world, the bubble in real estate, we down from here. you certainly would, talked about the increase in especially if you were living the federal debt, and not In addition to potential in Ukraine or Eastern only in the federal debt but Europe right now, or if you in the unfunded pension were in the Second World liability. Just to give you an War like I was. My parents example, at the time we “Look for patterns had their own business. wrote that piece, total They were successful and was $7 because you're lived in the best part of trillion. Today it’s $17 going to be building town, and then, one day, trillion. The unfunded Germany invaded Holland. liabilities were $40 trillion. this mental Germany took over the Today they're $90 trillion. country in five days and my When you have an database, a parents ended up in a environment like this, you concentration camp. obviously have to start framework of your thinking about what the end When you put all of these result will be. experience that things together, no matter you'll be able to what you think about the We've always written that short term problems in we believe the three most rely upon to help America, or the short-term important things when it to maybe intermediate-term comes to investing in stocks impact your problems in the market, you are interest rates, inflation, still get back to the fact that and the fundamentals of the decision making.” America is one of the business. Understanding and greatest places in the whole applying these elements in world. I personally don't our valuations are at the inflation, over the next few think there will ever be heart and soul of what we years, I believe we could be another place like this. do. These are the things I facing, and again I'm not pay the most attention to. predicting this, a potential G&D: A lot of value When I started seeing things currency crisis. That's the investors are strictly bottom beginning to change in 2004, other reason we were -up but after 2008-09 macro I began to realize that we happy to pick up the gold analysis has become a bit might experience another stocks after they declined more popular in the value period like the '70s, and, 50-80% from their 2011 camp. Can you give us an unless the Fed does the peak, because gold is one of overview of how you think right thing soon, we could the investments that could about it? How much weight have a period of higher hedge against a currency do you give to the macro inflation. When you add to crisis or high inflation. As environment and are there this the current P/E of about Jim mentioned earlier, we particular indicators that 18.5 or 19x (depending on also have about 10-15% in you think are particularly which index you use), oil-related companies. I telling? coupled with 1970s-like think basic commodities, at inflation, you could the right price, are also a AVDB: We wrote a piece eventually end up with P/Es very good way to hedge in December 2004, and it's on large caps of 8x and on against higher inflation or a on our website if anybody's small caps of 4x to 6x. I'm (Continued on page 21) interested, when we started IssueVolume XXI I, Issue 2 Page 21

Arnold Van Den Berg & Jim Brilliant

(Continued from page 20) Hilton (especially pages 21- stick it out no matter how currency crisis. 25), and When Genius Failed long it takes, and that you by Roger Lowenstein. have the belief that you're G&D: Switching topics Other philosophical books I going to be successful, now, do you have any books would recommend are As a because everybody can be you would recommend to Man Thinketh as well as Eight successful in this field if they aspiring or current investors Pillars of Prosperity, both by make the commitment and that you found especially James Allen, Think and Grow develop the discipline. valuable? Or books outside Rich by Napoleon Hill, and investing as well? The Richest Man in Babylon JB: I would just add that by George Clason. that learning is a lifetime AVDB: The book that is endeavor. Upon graduation, absolutely my favorite G&D: To wrap up, what you need to keep studying outside of normal advice would you give to and keep reading. Look for investment books is one I current students interested patterns because you're personally reprinted in a career in investing? And going to be building this because the publisher tells do you have any advice on mental database, a me they only sell about 25- life in general that you framework of your 50 copies a year. It’s called, would be willing to share? experience that you'll be From Poverty to Power by able to rely upon to help James Allen. I am happy to AVDB: I would give you guide your decision making. send it out to anybody who one quote by Dr. Karl Jung, While all the theory and will read it. If any of your the famous psychologist. Dr. education that you get in readers would like a copy, Jung claimed that the school is very valuable, the we’ll send them a copy at subconscious mind contains real world is where you're no charge. It does not deal not only all the knowledge going to gain that practical directly with money, that is gathered during the knowledge. While both are although it does in some life of the individual but, in important, it's been my aspects, but the philosophy addition, it contains all the observation that those that is great. I've been reading it wisdom of past ages. That develop the greatest for 32 years now. Every by drawing upon its wisdom practical knowledge end up time I go back to it, I find and power, the individual accumulating the most some new insight. may possess any good thing wealth, not just in terms of in life from health and monetary rewards, but For books regarding happiness to riches and wealth in terms of investments and business I success. I think that's the friendships and non- would recommend best quote that I can give monetary pursuits. I would Analysis by Graham and you on the subconscious encourage people to look at Dodd; The Intelligent Investor mind. As far as advice to a their university graduation by Ben Graham; Common young person starting off in as the beginning of a whole Stocks and Uncommon Profits, the business, I can only say other life experience that Paths to Wealth through that it's one of the greatest can pay . Common Stocks, Conservative businesses in the world. I Investors Sleep Well, and think there are as many G&D: That is a great note Developing an Investment opportunities today as when to end on. Thank you both Philosophy, all four by Philip I got started. I would for your time. Fisher. I’d also recommend encourage anybody who's Margin of Safety by Seth interested in the field and Klarman, Value Investing who loves it to go into it. Made Easy by Janet Lowe, The only advice I can give is Contrarian Investment that you make a Strategies by David Dreman, commitment that you will Be My Guest by Conrad Page 22

Allegion, Plc. (NYSE: ALLE) - Long 1st Place, 2014 Pershing Square Challenge

Brian Waterhouse Matt Ford Øystein Kværner [email protected] [email protected] [email protected]

Recommendation We recommend investors buy Allegion (ALLE) equity with a 12/31/16 base case price target of $75. This represents ~50% upside from the current share price. Our investment Brian Waterhouse thesis rests on four main points: Brian is a first-year MBA 1) Allegion should see accelerating topline growth as student at Columbia Business nonresidential construction spending rebounds from School. He is also Co-President cyclical lows in the US and Europe of the Columbia Student 2) The European business is significantly under-earning its Investment Management peer group and own historical averages – this can Association. Prior to CBS, Brian normalize with self-help opportunities on the cost side was an Associate at Millennium 3) Irish domiciling and basic tax optimization strategies should reduce the company’s effective tax rate below Technology Value Partners. 25% (vs. 31% in 2014). This drives low-risk EPS growth independent of any cyclical recovery

4) Given the high FCF this business generates (over $1billion in the next 4 years vs. a $5 billion market cap), effective capital allocation can drive meaningful upside (either via accretive M&A or buybacks) Business Description Allegion is a leading global provider of mechanical and elec- tronic security products that include key systems, exit de- vices, and other access control solutions. The business was part of Ingersoll Rand before being spun-off in late 2013. The company generated $2.1 bn of revenue in 2013, with the majority of its exposure coming from US non-residential Matt Ford end-markets where it is the #2 player behind Assa Abloy.

Matt is a first-year MBA student We think Allegion is a high-quality business in an attractive at Columbia Business School. industry with real barriers to entry related to required local Prior to CBS, Matt was an building code expertise, SKU intensity, and channel com- Analyst at Reservoir Capital, plexities. With security being a high-value need but only , and Bain representing a low percentage of total building costs, cus- Capital/Sankaty Advisors. tomer lock-in is high and the company has pricing power over time. This, combined with low capex requirements, leads to high FCF generation, and high returns on invested capital (21.4% over the last 3 years). We think Allegion can be a multi-year compounder with limited downside and the potential for significant upside. Investment Thesis 1) Rebound in topline growth Macroeconomic data suggests US and European non-residential construction spending remains well below long- term average levels, with Allegion’s relevant end-markets down 40%+ peak-to-trough and only having seen a mod- est recovery off the lows. In Europe, we think the market has only recently bottomed, with the Southern coun- Øystein Kværner tries where Allegion has the most exposure also down 40%+ from prior levels. All in, we don’t think non- Øystein is a first-year MBA residential was ever as overbuilt as residential and current spending remains much closer to the bottom than mid- student at Columbia Business cycle levels. Allegion has benefitted from high-margin retrofit work during the down-cycle but we think growth School. Prior to CBS, Øystein will accelerate as the new build market finally rebounds. was a Senior Associate Consultant at Bain & Company Taken together, we think the current $25 bn security access solutions market will grow at GDP-plus levels, with where he focused on Private 1-2% pricing coming on top of any underlying growth in construction spending. We also see secular trends of Equity consulting. increased budgets for building security and increased complexity/integration needs as driving additional growth. 2) European margin opportunity In Europe, we believe Allegion is significantly under-earning its peer group and its own historical averages and that this will mean-revert over time due to identifiable self-help drivers on the cost side. As context, this segment is breakeven today compared to historical average margins of 8-10%, historical peak margins of low/mid-teens, and current peer margins of up to 17% in Europe. The key issue is that while the company’s Southern European end-markets are down 40%+ from the peak, our diligence suggests the cost structure has basically not changed. This creates a large opportunity for overhead savings that current management is already executing on after being ignored as part of Ingersoll. In addition, the same LEAN team that improved US margins from the low-20s to the mid-/high-20s is just now getting started in IssueVolume XXI I, Issue 2 Page 23 Allegion, Plc. (Continued from previous page)

Europe. We think there should be a real efficiency opportunity here given Europe is 20% of sales yet represents ~55% of the business inventory. 3) Effective planning around Irish domiciled tax status Allegion is guiding to a 31% effective tax rate this year but is an Irish domiciled company, a country with a corporate rate of 12.5% History tells us that other Irish domiciled companies have been able to significantly reduce their effective tax rates over time. In addition, the fact that ALLE has high US profitability exposure should not mean it can’t pay a much lower rate with effective planning (as an example, Ingersoll Rand pays an effective rate of 25% despite having a similar mix of US revenues). Between basic tax optimization strategies and a structural shift to more international profitability, we think ALLE can lower its effective tax rate to at least 25%, with a good chance of doing even better. We would also note that Allegion can use its Irish domiciling as a strategic asset going forward. The key way we see that playing out is via M&A. The company’s tax status gives it a structural advantage as a buyer and any assets they buy in lower tax jurisdictions should create a positive feedback loop that helps to further reduce its tax rate. 4) Capital allocation upside Allegion is highly FCF generative – we think the business will generate over $1 bn of FCF in the next four years vs. a market cap today of $5 bn. Management has already laid out an initial framework to return at least 35% of annual FCF to via buybacks and dividends with a further 50% allocated toward strategic growth initiatives and/or M&A. Over time, the M&A story here could be compelling. With a still- fragmented international market, we think Allegion can copy the Assa Abloy playbook for highly accretive M&A. ASSA has done over 100 deals in the last 9 years, generally buying tuck-in businesses at reasonable multi- ples (8-10x EBITDA) and then extracting synergies. If we assume ALLE can find deals at similar economics as Assa, we think accretive M&A could add $10-$20 of additional value, taking our $75 base case closer to $100. Absent M&A, we think FCF can be used to aggressively buy back shares and drive EPS upside. At current prices, we estimate ALLE would be able to buy back 22% of its float with cumulative FCF by 2017.

Key Risks The investment is not without its risks but we think many of the key ones are nicely mitigated. A downturn in non- residential spending should be largely limited given already cyclically depressed numbers. While there is some risk that management won’t execute on European margins, we take comfort that most of the low-hanging fruit has been identified and the company is using the same LEAN team that has already succeeded in the US. As for the risk of increased compe- tition, we would note a largely stable, localized monopoly type industry structure in the developed world and the inability of Asian manufacturers to meaningfully gain traction in the US given the high barriers to entry. Overall, we think the hardest risk to gauge today is management’s ability to optimize capital deployment. Its first few deals will be critically important in our view. Valuation Our $75 price target is based on a 16.5x forward multiple of 2017E EPS of $4.53 (this assumes no M&A but a 13% reduc- tion in average share count vs. today from buybacks). We think Allegion deserves a premium to a market multiple over the cycle for its business quality and earnings growth potential. In addition, we would note that if management more aggressively deployed FCF, we think it could buy back over 20% of its market cap (assuming current prices) and our $75 target would then represent only 14.3x our adjusted 2017 EPS estimate under that scenario. We also believe the investment has attractive skew, with a base case to downside case reward/risk of 2.6x. We view absolute downside from current levels as somewhat capped given Allegion is an interesting takeout candidate. Outside of the core security comps, we think building control solutions providers such as UTX and Honeywell could be interested in moving more into the security access solutions market. Allegion’s Irish domiciled status adds to its potential attractive- ness as a target for these companies (which also have lot of international cash on their balance sheets to deploy). If the share price were to dip much below $40, we expect buyers would likely line up to bang on its door.

Financials: 2010 2011 2012 2013 2014E 2015E 2016E 2017E Revenue $1,967.7 $2,021.2 $2,046.6 $2,093.5 $2,182.8 $2,313.2 $2,466.8 $2,623.0 % Growth 2.7% 1.3% 2.3% 4.3% 6.0% 6.6% 6.3% EBITDA $375.3 $405.3 $420.7 $409.4 $425.4 $470.0 $530.8 $588.4 % Margin 19.1% 20.1% 20.6% 19.6% 19.5% 20.3% 21.5% 22.4% FCF $186.0 $240.0 $249.6 $203.7 $226.2 $265.5 $315.6 $371.4

EPS $2.38 $2.13 $2.36 $2.91 $3.64 $4.53 Avg. Shares Outstanding 96.5 96.5 94.2 89.8 84.1 Page 24

Cablevision Systems Corporation (NYSE: CVC) - Short 2nd Place, 2014 Pershing Square Challenge

Joe Goldschmid Allen Keel Mahmud Riffat [email protected] [email protected] [email protected]

Recommendation As of April 7, 2014 ($ mm, except per share data)

We recommend shorting Cablevision (CVC) with a potential return of Current Capitalization Joe Goldschmid +52%. There are three main points to our investment thesis: Stock Price $16.12 Joe is in his final year of the Shares Outstanding 267.6 Joint JD/MBA Program at 1) Real and Accelerating FiOS Threat—Verizon FiOS is a superior fiber- Market Capitalization $4,314 Columbia University. Prior to to-the-home product, which once fully rolled-out, typically leads Debt 9,759 to 40-50% subscriber losses for incumbent cable operators. Collateralized Debt (818) Columbia, he was an analyst in Other Adjustments 18 the Division 2) Continued Margin Erosion with an Over-leveraged Balance Sheet— Cash (702) of Morgan Stanley. He holds a CVC has limited pricing power, and thus, limited ability to pass Enterprise Value $12,572 BS from Massachusetts Institute through soaring programming costs. This reduction in free cash Trading Statistics of Technology. flow prevents deleveraging and jeopardizes the dividend. 52 Week High / Low $20.16 / $13.88 Avg. 3M Daily Volume (mm) 3.63 3) Takeover Speculation has Artificially Driven Up Valuation—CVC is not Borrow Cost 50 bps an attractive acquisition candidate, and current shareholders over- Short Interest 16.4%

estimate the likelihood of a takeout. Valuation Business Description 2014E 2015E 2016E

Cablevision is the fifth largest cable operator in the US, providing video, EV / EBITDA 8.1x 8.9x 9.3x EV / EBITDA - Capex 17.4x 21.2x 23.9x high-speed data, and voice services to 3.2 million subscribers in and P / E 51.8x 580.6x n/a around the New York Metropolitan area. The cable segment accounts Levered FCF Yield 3.5% 1.5% (0.5%) for ~90% of the company’s revenue ($6.2 bn) and EBITDA ($1.6 bn). Net Debt / EBITDA 5.3x 5.8x 6.1x Allen Keel Allen is a second-year MBA Investment Thesis Target Price / Return student at Columbia Business 1) Real and Accelerating FiOS Threat Target Price $7.06 School. Prior to CBS, Allen Total Return 52.0% worked for four years in private For many years, cable operators had de facto monopolies in their re- equity and investment banking spective regional footprints with minimal overbuild from competitors. However, in 2004, Verizon announced the at Lindsay Goldberg and Merrill planned build-out of FiOS, a $23 billion fiber-to-the-home network providing video, high-speed data, and voice Lynch. He holds a BS from services. Duke University. FiOS disrupts the monopoly model for incumbent cable operators for several reasons, namely the superior prod- uct offering (highest speed internet available), leading customer satisfaction (lowest industry churn rate), and Veri- zon’s well-capitalized balance sheet, which allows for promotional offers sufficiently low to compensate new sub- scribers for their switching costs.

Given Cablevision’s geographically concentrated footprint, the company is the most exposed to fiber out of any cable operator. Currently approximately 51% of CVC’s footprint is exposed to FiOS, and this is estimated to increase to ~66% as Verizon complete its obligation to pass 100% of all New York City housing units by June 30, 2014, per the terms of the company’s 2008 Franchise Agreement.

Currently only ~40% of homes in CVC’s NYC footprint in the Bronx and Brooklyn (~23% of CVC’s total custom- Mahmud Riffat ers) have access to FiOS. We expect this figure to approach 100% as Verizon completes its obligation under the Mahmud is a second-year MBA NYC Franchise Agreement. student in the Value Investing To analyze the likely impact of the FiOS rollout on CVC’s customer base, we examined the effect of FiOS entry Program at Columbia Business into other markets using data from the US Copyright Office. The losses after FiOS entered a market were devas- School. Prior to CBS, Mahmud tating. For example, in the worked for five years in private parts of Massachusetts that Estimated Eventual Cable Operator Overlap with Fiber (FiOS and AT&T U-Verse) equity and investment banking FiOS entered in 2006, Com- at Global Infrastructure cast (the incumbent cable 100% Partners and Merrill Lynch. He operator) suffered cumulative holds a BSFS from Georgetown subscriber declines of 55%. A 26% University. similar phenomenon occurred 80% 41% 56% in Staten Island after FiOS was 61% 58% 61% 8% introduced in 2006. Time 60% Warner Cable lost ~45% of its 8% subscribers to FiOS.

% % Overlap 40%

Our base case CVC subscrib- 24% 66% er projections use the Com- 32% 24% 51% cast Massachusetts decline 20% 34% 19% curve applied to CVC’s fiber- 14% 9% overlap footprint. Cablevision 0% 4% Charter Cox Time Warner Cable Comcast Cablevision - Cablevision - has lost 10% of its subscribers Current Projected FiOS U-Verse Other No Fiber IssueVolume XXI I, Issue 2 Page 25 Cablevision Systems Corporation (Continued from previous page)

EBITDA Margin Erosion through 2013, and we project even- 26.0% tual cumulative losses of over 20%. 2) Continued Margin Erosion with an 1.2% 25.0% Over-leveraged Balance Sheet 24.0% As Verizon builds out FiOS, Cablevi- 2.0% 23.0% sion faces a limited ability to raise 25.7% prices, despite soaring programming 22.0% 0.3% costs. Studies have found that cable 0.2% 22.4% prices are 15-30% lower in areas 21.0% 22.2% 2016E EBITDA (%) Margins EBITDA 2016E 21.9% 21.9% with significant competition versus

20.0% the norm of near-monopoly markets. Consensus '16E # of Subscribers ARPU ($/sub/mo) Cost Growth Other (1) Our '16E EBITDA The effect of the FiOS competition EBITDA Margins Margins can already be observed in Cablevi- sion’s significant EBITDA margin erosion since 2011. Other publicly traded cable operators better insulated from competition have cable-segment EBITDA margins near 35-40% versus the current 30% for Cablevision. We expect margins to erode further as the FiOS build-out accelerates. Cablevision’s profitability is not sustainable in an environment where programming costs have grown at 8 to 12% annually, but Cablevision’s revenue per user has only grown 2-3% per year. The company’s high leverage (5.3x Net Debt / ’14E EBITDA) exacerbates this share price decline and puts the dividend at risk. 3) Takeover Speculation Artificially Driving Up Valuation Cablevision’s stock price has far outpaced fundamentals based on takeover speculation. The M&A rumors began in June 2013 after Charter made its initial offer for Time Warner Cable, and Cablevision’s stock increased more than 25% over the next month. Despite high estimated operating synergies in an acquisition, there are no likely strategic acquirers. All of the cable operators have observed or experienced the devastating results of FiOS competition in their own cable footprints, and will not want to acquire the operator with the highest FiOS overlap. Moreover, given Cablevision’s bleak compet- itive outlook, the synergies from a strategic acquisition would only warrant a 10% takeover premium to current Low Base High trading levels. This results in a compelling risk-reward 2016E Subscribers (mm) 2.83 2.93 3.07 ratio for our short recommendation. x: Monthly ARPU $156.77 $156.25 $165.14 Cable Revenue (mm) $5,320.2 $5,486.3 $6,074.4 Valuation Plus: Other Revenue 652.8 659.2 664.5 Total Revenue $5,973.0 $6,145.6 $6,738.9 We expect a severe reduction in EBITDA by 2016. This Less: COGS & SG&A (4,644.0) (4,796.9) (5,099.1) decrease is driven primarily by customer losses and 2016E EBITDA (mm) $1,328.9 $1,348.7 $1,639.8 margin erosion in Cablevision’s FiOS overlap areas. Our Multiple 7.0x 7.5x 8.0x TEV $9,302.6 $10,115.2 $13,118.7 target share price of $7 amounts to a 52% total return when factoring in dividends and stock borrow costs. Less: Net Debt (8,404.3) (8,226.5) (7,585.7) Target Equity Value $898.3 $1,888.7 $5,533.0 Near-term Catalysts A) Contractual: Verizon has publicly stated that they will Divided by: Shares O/S 267.6 267.6 267.6 comply with their 2008 Franchise Agreement by passing Target Price per Share $3.36 $7.06 $20.67 % Upside / (Downside) on Short Sale 79.2% 56.2% (28.2%) 100% of New York City housing units by June 30, 2014. B) Political: The Mayor de Blasio Administration seems Plus: Dividends + Borrowing Costs @ 0.5% determined to force Verizon’s compliance with the 2008 Per Share ($0.68) ($0.68) ($0.68) Franchise Agreement by framing affordable broadband % Upside / (Downside) (4.2%) (4.2%) (4.2%) access as an economic-justice issue. Total Return: Per Share $12.08 $8.38 ($5.23) C) Economic: Verizon will aggressively market its FiOS Total % Upside / (Downside) 75.0% 52.0% (32.5%) product. Once Verizon has “passed” a building, the incremental investment to connect the building is well Free Cash Flow Metrics: 2016E Unlevered FCF 488.8 540.2 722.0 worth the expected return on capital. FiOS typically Implied Unlevered FCF Yield 5.3% 5.3% 5.5% captures more than 40-50% market share. 2016E Levered FCF (73.6) (22.2) 169.2 Key Investment Risks: Implied Levered FCF Yield (8.2%) (1.2%) 3.1% (1) An irrational strategic buyer acquires Cablevision, or the Dolan family attempts to take Cablevision private. (2) Cablevision improves operations and profitability by enhancing product offerings that maintain or increase the sub- scriber base. (3)The Verizon FiOS rollout does not materialize. Verizon fails to comply with its contractual commit- ment to build out its fiber network in New York City. Page 26

Carnival Corporation (NYSE: CCL) - Long 2014 Pershing Square Challenge

Juliana Bogoricin Charles Buaron Ben Isaac [email protected] [email protected] [email protected]

(in millions, except per share figures) Recommendation Current Capitalization We recommend a long position in Carnival Corp. (NYSE: CCL) with a two-year Share Price (4/17/14) $37.32 Juliana Bogoricin Base Case target price of ~$57 representing ~53% upside from 4/17/14 share price. FDS 776 As a result of one-time setbacks, CCL now trades at a significant discount to its Market Capitalization $28,975 Prior to CBS, Juliana was a intrinsic value. (1) Reversion to positive industry trends on ticket prices in a high private equity Associate at fixed cost business will lead to substantial margin upside while (II) operational Plus: Debt $9,610 Platinum Equity and an improvements driven by a new CEO provides additional opportunity. Less: Cash & Equiv. (421) investment banking Analyst at Enterprise Value $38,164 Credit Suisse. Juliana holds a Business Description Trading Statistics B.S. from the Wharton School. CCL is the #1 player in the cruise industry with market share of ~48% servicing At CBS, Juliana is a VP of the 52-wk Range $31.44 - $41.89 over 10 million passengers annually through a fleet of 101 cruise ships and a portfo- Dividend Yield 2.68% Investment Ideas Club. lio of 10 brands. CCL was incorporated in 1972 and is headquartered in Miami, Avg 3M Dly Vlm (mm) $136 Florida. Valuation Summary Situation Overview 2015E 2016E CCL has experienced two major incidents in two years. The Costa Concordia ran Consensus: aground due to captain error causing 32 fatalities in January 2012, and the Carnival TEV / EBIT 17.6x 14.5x P / EPS 15.9x 12.6x Triumph lost power stranding the ship for five days without working facilities in February 2013. These misfortunes have created severe dislocation in CCL’s financial Base Case: performance highlighted by its unprecedented divergence from industry pricing TEV / EBIT 16.0x 12.3x trends, best-in-class margins becoming worst-in-class and 40%+ underperformance P / EPS 13.5x 9.8x to the S&P. This dislocation has created significant opportunity leaving behind an Charles Buaron attractive stock trading below replacement cost. Bull Case: TEV / EBIT 12.6x 10.0x Prior to CBS, Charles was a Investment Thesis P / EPS 10.2x 7.5x private equity Sr. Associate at 1. Reversion Cerberus Capital and an investment banking Analyst at A) Adjusting for FY13 one-off issues: FY13 was a difficult year for CCL as the incidents drove up expenses and Goldman Sachs. Charles holds reduced pricing. Repair & maintenance, advertising and pricing were significantly impacted as they diverged a B.A. from Brown University. from peer and historical trends. By normalizing these At CBS, Charles is a VP of the line items, we see a clear path to 500+ bps of EBIT $185Divergence in Avg. Ticket Pricing margin improvement. Investment Ideas Club. $180 B) Pricing rebound to industry norm: Over the long-term ~900 bps Margin $175 industry-wide pricing has enjoyed an upward trajectory Opportunity even through cyclical interruptions. Additionally, com- $170 petitor pricing has always trended together with histori- cal correlations of over 95% until 2012. Subsequently, $165 CCL displayed unprecedented divergence from positive $160 pricing trends. The timing of the incidents were espe- cially punitive as they interrupted CCL’s rebound from $155 the financial crisis. If CCL’s rebound from the trough in $150 2009 had remained uninterrupted and continued at the 2009 2010 2011 2012 2013 same pace as peers, margins would have nearly doubled CCL CCL Adj. RCL NCL from current levels. Meanwhile, competitor margins and Ben Isaac % Delta from Peak Prior to CBS, Ben was an pricing have largely recovered; some have even reached peak levels. Pricing: CCL RCL NCL– Analyst at Ingalls & Snyder C) Timing of brand recovery: Before CCL can see price increases, its brand and – Value Partners. Ben holds a B.A. (5%) reputation needs to be repaired. Our research has shown that while the Cos- (6%) from Williams College. At CBS, (10%) ta and Carnival brands were hurt by the incidents, they are not broken. In (15%) Ben is a VP of the Investment (20%) fact, the Costa brand has seen pricing and yield growth at the end of last year, (19%) (25%) Ideas Club. and the Carnival brand’s recovery is nearly complete. As we pass the second Margins: CCL RCL NCL anniversary of the Costa Concordia incident, we approach the point of brand – (2%) recovery and a reversion to positive industry pricing trends. (20%) (40%) D) Favorable industry dynamics support reversion: The global cruise sector has (40%) (60%) (59%) demonstrated yearly demand growth at 5% matching supply growth even (80%) during recessionary periods. The oligopolistic industry structure with con- sistent market shares highlights that competitors are relatively rational, while high barriers-to-entry preclude new entrants from taking share. Additionally, demographic tailwinds support volume and pricing growth as the youngest baby boomer is becoming a core cruise consumer at age 40. Lastly, the cruise product’s value proposition is strong relative to other travel opportunities. We like these characteristics and believe they lay a solid foundation on which a reversion thesis can materialize. IssueVolume XXI I, Issue 2 Page 27

Carnival Corp. (Continued from previous page)

II. Operational Improvements A) Potential for other significant margin improvement: Given CCL’s scale advantage in a high fixed cost business, the EBIT Margins company should enjoy higher operating margins rela- FY 2005 FY 2013 tive to its smaller competitors (~48% market share vs. CCL 24% 10%EBIT Margins 30% RCL 18% 11% next largest RCL at ~23%). Since 2005, CCL’s histori- Financial NCL 4% 15% Crisis Divergence due cally best-in-class margin profile has dissipated leaving it 25% to incidents with the lowest EBIT margin of its peers in 2013. Our 20%

research suggests CCL previously did not manage costs 15% effectively or take advantage of scale economies by 10% integrating operations across its 10 brands. Given that CCL is a roll-up of acquisitions, integration synergies 5% – exist as CCL currently carries 6 headquarters, 10 yield 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 management systems, 2 sales force offices and 3 reser- CCL RCL NCL vation systems. B) New CEO better positioned to execute on margins: Micky Arison, the previous CEO, was instrumental in the consoli- dation of the cruise industry (ending in 2003 with the Princess acquisition), but less operationally hands-on. He stepped down during CCL’s run of disasters and announced in June 2013 that the new CEO would be Arnold W. Donald (a long-standing board member). We believe the new CEO makes CCL more likely to undergo positive change. Donald is more focused on opera- tional opportunities and has a good reputation among company insiders. He is also heavily incentivized with equity and stands to make up to $24mm per year if Total Stock Returns reaches 17%. We think this fact pattern makes operational improvements within the company much more likely. Valuation: Our 2-year target price in the Base Case is ~$57 per share representing a 53% gross return ($ in millions, except per share figures) from 4/17/14 share price of $37.32. Our assump- Valuation and Upside/Downside Scenarios tions include: Variance  Pricing: Improves at a ~3% CAGR. CCL’s pricing Base Bear Bull Street to Base was growing at 4% in FY11 before the Costa inci- Key 2016E Estimates: dent interrupted its rebound from the financial Revenue $18,512 $17,170 $19,441 $18,302 1.1% crisis. EBIT $3,093 $2,027 $3,831 $2,629 17.6% EBIT % Margin 16.7% 11.8% 19.7% 14.4% 2.3%  Volumes: Grow in line with capacity expansion. EPS $3.82 $2.28 $4.97 $2.97 28.5% Supply pipeline is highly visible as players announce Valuation: shipbuilding plans 3-5 years in advance. Target PE Multiple 15.0x 14.0x 15.5x  Margins: Improve to ~17%. Given the high fixed 2-Yr Target Price $57.26 $31.90 $77.02 cost nature of this business, price increases have a % Upside (excl. dividends) 53% (15%) 106% substantial impact on the bottom line. % IRR (incl. dividends) 26% (5%) 46%  Multiple: Apply a 15x P/E multiple on our FY16 Implied Multiples on Current Valuation: Base Case EPS estimate. CCL has historically trad- TEV / EBIT 12.3x 18.8x 10.0x P / EPS 9.8x 16.4x 7.5x ed at 16x P/E across cycles, and we believe CCL is Key Assumptions: not structurally different than it was historically. FY13-16 Pricing CAGR 3.3% (0.0%) 5.5% In conclusion, our assumptions imply investing in FY13-16 Volume CAGR 3.3% 3.3% 3.3% CCL at less than 10x FY16 earnings in our Base Case and 7.5x in our Bull Case. We believe substantial capital impairment is unlikely as we are buying ~50% of the global cruise fleet at below replacement cost. Lastly, we believe CCL offers an attractive risk/reward profile with Base / Bear yielding 3.7x, and Bull / Bear yielding 7.3x. Key Risks: (1) Overcapacity could weaken economics; (2) Pricing remain depressed or decline; (3) Mismanagement potential; (4) Another accident; (5) Consumers’ shift away from cruising as a vacation alternative.

($ in millions; except per ALBD and ticket pricing figures) FYE November 30, 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E Summary Income Statement Volume (ALBD) 54 59 62 67 70 72 74 76 79 82 % Growth 8.4% 8.9% 5.4% 7.1% 5.1% 2.9% 2.9% 2.8% 3.2% 3.9% Ticket Pricing $181 $195 $166 $167 $174 $162 $157 $159 $165 $174 % Growth 1.5% 8.0% (15.2%) 0.5% 4.3% (6.8%) (2.9%) 1.0% 4.0% 5.0% Total Revenues $13,033 $14,947 $13,460 $14,469 $15,793 $15,382 $15,456 $16,017 $17,100 $18,512 % Growth 10.1% 14.7% (9.9%) 7.5% 9.2% (2.6%) 0.5% 3.6% 6.8% 8.3% EBIT $2,725 $2,729 $2,154 $2,347 $2,283 $1,872 $1,541 $1,819 $2,381 $3,093 % Margin 20.9% 18.3% 16.0% 16.2% 14.5% 12.2% 10.0% 11.4% 13.9% 16.7% EBIT / ALBD $50 $46 $35 $35 $33 $26 $21 $24 $30 $38 Note: ALBD is a measure of capacity - # of beds available per year (“Available Lower Berth Days”) Page 28

Clean Harbors, Inc. (NYSE: CLH) - Long

2014 Pershing Square Challenge Matt Bracewell, CFA Patrick Enriquez-Fischer Pavel Kaganas

[email protected] [email protected] [email protected]

Note: On April 24th (one day after the Pershing Square Challenge finals), Relational Investors filed a 13D disclosing a 9% stake in CLH. Recommendation Matt Bracewell, CFA We recommend investors buy Clean Harbors, Inc. (CLH) stock with a 12-18-month target share price of $85-95, Matt is a first-year student at representing ~50-70% upside . There are five main points to our investment thesis: CBS and is on the board of the 1) A fair valuation of the core hazardous waste management business more than covers the current share price Columbia Student Investment with only 70% of the EBITDA. “The Core” has dominant market share, economies of scale, regulatory pro- Management Association. Prior tection, excellent customer captivity and great ROICs to CBS, Matt was an Associate at Navigation Capital. He will 2) The shares are mispriced and out of favor due to transitory issues (weather and FX) and over-focus on the intern at Owl Creek Asset under-performance of a small segment (Re-refining) Management in the summer. 3) Several non-core assets should be divested to generate cash for buybacks/acquisitions, and to re-focus man- agement on the Core business Key Trading Statistics and Financial Highlights 4) The industry changes that have ($M) hurt Re-refining have bottomed, Share Price $55.32 Dec-12 Dec-13 Dec-14 E Dec-15 Dec-16

and some structural industry Mkt. Cap $3,368 Revenue $2,188 $3,522 $3,604 $3,777 $4,034

shifts will convert Re-refining +Net Debt $1,300 EBITDA $374 $528 $583 $679 $764

into a more stable “process EV $4,667 FCF $130 $138 $180 $223 $241 business” 52-Wk H/L $44.9/$64.1 RR FCF $170 $284 $280 $322 $334 5) Management shifts will re-align EV/15E EBITDA 6.9x Adj. EPS $3.09 $2.46 $2.75 $3.56 $4.27 attention on capital allocation 2015E Adj. P/E 15.5x Rev Grth 10.3% 60.9% 2.3% 4.8% 6.8% and re-focus on the Core Patrick Enriquez- 2015E RR FCF Yld 10.6% EBITDA Grth 6.8% 41.3% 10.5% 16.4% 12.5% Fischer Business Description 2016E Adj. P/E 12.9x EBITDA Mrg 17.1% 15.0% 16.2% 18.0% 18.9% Patrick is a first-year student at The Core (Technical Services-TS, Safety-Kleen Environmental-SKE, and Industrial & Field Services-IFS) is a vertical- CBS and is on the board of the ly integrated hazardous waste disposal business; from cleaning, to collection, transportation, and disposal/recycling; Columbia Student Investment carried out through 10K+ specialized vehicles, 8 incinerators (68% of N.A. capacity), and 11 landfills (24% of N.A Management Association. Prior capacity). The other businesses include used oil re-refineries, housing lodges in Alberta, CA, and O&G Field Ser- to CBS, Patrick worked at vices (seismic, rentals, waste fluids). CLH has grown organically and though acquisitions and highly successful inte- Morgan Stanley in Mexico. He gration, compounding revenue and EBITDA at 23% and 26% since 2000. will intern at Permian Investment Thesis NA Incinerator Capacity Investment Partners in the Other, 4% 1) The Core provides full margin of safety with competitive advantages summer. Heritage, 7%

 Economies of Scale - CLH is the largest player in every haz-waste end mar- Ross, 9% ket and dominates national accounts. The incinerators and landfills are large

fixed-cost assets that provide tremendous operating leverage (incinerators Veolia, 12% have 30-40% EBITDA margins and 90+% utilization; landfills have 20+ year

remaining life), and a multi-year expansion comes online in 2016, increasing CLH, 68% incineration capacity by 13% at double the revenue per unit. The rest of the company is focused on driving additional waste volumes into the disposal network. This allows CLH to be a full-service provider of related waste, cleaning and technical services and they have over 1,300 employees at cus- NA Landfill Capacity Other, 5% Pavel Kaganas tomer sites, supplementing workforces. Heritage, Pavel is a first-year student at  Customer Captivity - US regulations mandate that waste generators keep 9% CLH, 24% CBS. Prior to CBS, Pavel was a the cradle-to-grave liability on their waste, so there are tremendous pre- Vice President in the Private qualifications for disposers. There is almost no customer turnover since WM, 18% Equity group of Morgan Joseph CLH provides full tracking and paper-trail, so customers do not risk switch- TriArtisan. He will intern at ing providers (customer captivity). ECOL, 19% Arch Capital Management in the summer.  Irreplaceable Asset Value - Difficult permitting and regulatory barriers create EQ, 25% huge moats, and there has not been a greenfield haz incinerator or landfill for 16 yrs+. High capital costs are generated by a large in- stalled infrastructure base and complicated logistical network. Technical Services ROIC CLH assets are essentially irreplaceable and permitting is a lengthy process, but these assets are insured for $3-4B. 24.8% 23.4% 23.6%  Regulatory barriers - Regulations protect almost every aspect 22.3% of disposal operations. Customers are governed by RCRA 20.8% regulations which mandate which wastes have to be burned or go to a designated hazardous landfill. 2009 2010 2011 2012 2013 IssueVolume XXI I, Issue 2 Page 29

Clean Harbors, Inc. (continued from previous page)

 TS and SKE (43% of EBITDA) are #1 in their markets for recurring waste from customers’ ongoing operations, and provide most of the waste volume to the core disposal network. IFS (14% EBITDA) is the leader in event- driven mission-critical services; heavy-duty cleaning, planned plant turnovers, and natural disaster rapid response. 2) Out of favor on transitory issues and misses in re-refining  The company was a market darling for years, but has now missed for 6 of the last 7 quarters. a. Weather issues have hurt CLH for 5 of the past 8 quarters; $30M+ EBITDA effect in 2013 and anoth- er $15-20M so far in 2014. The street is now extrapolating these margins. CAD FX hit for another $20M. b. In late 2012, CLH acquired Safety Kleen (SK) for $1.3B to drive more volume into its disposal assets, picking up a large collections network with 200,000 customers. The SK Environmental piece of SK has been a tremendous success, with annual cost saving of $100M+. The Re-refining piece meanwhile suffered as the industry’s price and cost indices diverged the first time in years and 2013 EBITDA came in $80mm below original guidance. The knife has already fallen and the industry is correcting.  The multiple misses on transitory weather and Re-refining have overshadowed the SK Enviro success, turned sentiment negative, and now the Street is unwilling to reflect their own documented expectations for volume growth and pricing power in their financial projections. The Street is just dead wrong. 3) Sell non-core Lodging and Seismic assets to re-deploy capital and focus attention on the Core  Lodging is a $65mm EBITDA business, buried within CLH at the street’s 8x valuation. Meanwhile the industry is trading assets at 11.0-12.5x, the planned OIS spin-off showing low-teen valuation, and another major acquirer is seeking to deploy capital. This can generate $700M+ of proceeds with another $100M+ from selling Seismic.  These proceeds can be directed towards a buy-back (10% accretive in ’16) or to acquire one of the two large competitors of the Core that are currently for sale.  These sales will re-direct management and investors’ attention to the Core, proper capital allocation, and ROIC, which has been dragged down by non-core businesses. 4) Re-refining is not a falling knife and the industry is correcting. Was most of Historical Lube Price Spreads EBITDA miss, but only small portion of our base case upside.  Historically, the primary product from the waste oil collections indus-

try has been low-value-add recycled fuel oil. As a result, price paid for Costs flat &… collected waste oil, the primary input cost, by industry standard was also indexed to the price of this fuel oil. Prices for base lube, currently representing 1/3 of output, have also tracked the fuel oil indices for years, but recently, base lube and used oil costs diverged, pressuring re-refining margins. But, new recycling technology and cheap nat gas is increasingly driving volume into high-value-add base lube production – …prices down = margin compression and CLH is the #1 lube re-refiner with 51% of N.A. capacity.  Primary diligence confirms that the industry ($M) 2015 Metrics (base) 2016 Metrics (base) is starting to re-index the prices paid for EBITDA Multiple EV EBITDA Multiple EV CORE (a) $606 8.5x $5,149 $681 8.0x $5,445 waste oil to base lube. This will explicitly O&G Field (a) 43 6.5x 277 54 6.0x 324 match revs and costs of lube re-refiners to Re-refining 77 7.0x 537 80 7.0x 561 the same index, eliminate commodity risk Lodging 84 10.0x 840 88 9.5x 838 from the COGS stack, and turn Re-refining Seismic 21 6.5x 137 22 6.0x 132 Corp. OH (151) 7.0x (1,057) (161) 6.5x (1,049) into a fixed-margin process business, lifting Total EV $679 8.7x $5,882 $764 8.2x $6,251 valuation. less: Net Debt $1,015 $758 5) Leadership changes can fix some capital allocation Equity Value $4,867 $5,494 mis-steps and redirect attention to Core and ROIC Implied Share Price $82.44 $93.05 Upside to Current 49%55 68%55  Board and management are indicative of (a) Core excludes Lodging and O&G Field excludes Seismic; non-core units to be sold CLH’s (successful) roll-up history. Board (b) Net debt allocated 80% to Core, 10% to O&G Field, and 10% to Re-refining enhancements and a permanent CFO would bring in the experience to guide a $5B, di- EBITDA less Implied verse environmental firm and bring focus Value Walk Corp. OH Share Value Cummulative Upside 2015 Core Business (a)(b) $500 $60.93 $60.93 10% onto capital deployment and returns. 2015 O&G Field Services (a)(b) 27 $1.17 $62.11 12% 2015 Oil Re-refining (a)(b) 62 $5.59 $67.70 22% Valuation Sell Lodging & Seismic 90 $14.75 $82.44 49% Base Target $679 $82.44 2015 SOTP and Value Walk show margin of safety New Incinerator 32 $4.59 $87.03 57% from the Core, with the other segments acting as Core Improvement (1% margin) 27 $3.24 $90.27 63% “free options.” But 2016 represents CLH’s true Lube $ Reversal (~half of '13 declines) 40 $4.74 $95.01 72% earnings power, as CLH bring on the new inciner- CAD FX Rate 15 $2.20 $97.21 Near-term Value Potential $793 $97.21 76% ator, benefits from $200M of growth capex at 20% 2016 Base Case $764 $93.05 68% ROICs, and Re-refining eliminates some valuation 2016 Bull Case $862 $106.40 92% discount. This points to the high end of our range. Page 30

Naspers (JSE:NPN) - Long 2014 Pershing Square Challenge

Carter Roehl George Taras Luke Tashie [email protected] [email protected] [email protected]

Naspers is the world’s best company you’ve never heard of — and Mr. Market is paying us to own its core assets Carter Roehl Carter is a first year MBA Naspers is a South African internet and media company with a $41 billion market capitalization and a phenomenal student at Columbia Business collection of compounding assets with sustainable long-term upside. The company’s ownership in publicly traded School. Prior to CBS, Carter internet assets is worth $45 billion dollars, which is greater than Naspers’ total market capitalization. Additionally, worked in private equity at Naspers owns over 120+ other Veritas Capital after spending internet assets, including leading two years in Bank of America online classifieds, marketplace and Merrill Lynch’s Global e-tail sites, in winner-takes-all Leveraged Finance Group. markets at the cusp of monetiza- tion in the fastest growing regions of the world. Naspers also owns a 30%+ margin quasi-monopoly PayTV business currently expand- ing throughout Sub-Sarahan Africa, where the subscriber base is ex- pected to more than double by 2020. We recommend buying Naspers and shorting the publicly traded assets to exploit this opportunity

Business Description George Taras Naspers operates in three segments: PayTV, Internet, and a legacy print business upon which it was founded. George is a first year MBA PayTV generates over $1bn in EBITDA annually, has >90% market share in its core markets and we conservatively student at Columbia Business project y/y topline and EBITDA growth of 12% and 15%, respectively, for the next three years. The internet seg- School. Prior to CBS, George ment is comprised of Naspers’ 34% interest in Tencent, its 29% interest in Mail.ru and its partial and full owner- worked in consumer private ship of over 120+ additional internet businesses in emerging markets, mostly focused in online classifieds, ecom- equity after spending four years merce and marketplace business models. The legacy Print media business is profitable, but not a substantial por- as a generalist in M&A and tion of the business today. investment banking advisory at Citadel and Deutsche Bank. Investment Thesis

The market is currently valuing Naspers’ interest in its listed assets (Tencent and Mail.ru) at greater than 100% of the entire value of Naspers The Naspers “stub” (in USD billions) Mr. Market’s Naspers Current Market Cap $41.2 represents the com- Current Offer pounding and high Subtract: growth business to which Intrinsic Value (in USD billions) Great the market is currently Pay-TV $10.0 Businesses To

ascribing a negative $3.3 Unlisted Internet Interests 10.0 Which the Market billion valuation. Conser- Print Media 0.5 Is Ascribing a Tencent (34.2% owned) 42.7 Luke Tashie vatively, we think the Negative Value Naspers “stub” is worth Mail.ru (28.7% owned) 1.8 Less: Corporate OH (0.3) Luke is a first year MBA student >$20 billion resulting in at Columbia Business School. Less: Net Debt (0.7) Naspers’ Intrinsic total mispricing of $23 Naspers Intrinsic Equity Value $64.0 Prior to CBS, Luke acquired billion. Value and operated two small The “stub” has historical- businesses after working as an ly traded at a positive Mispricing ($22.8) Free Money analyst for four years at value and has only re- Noonday Asset Management cently traded down as a (Farallon Capital). Implied Unlisted Asset Equity Value (i.e. the "stub") ($3.3) result of significant in- (PayTV + Unlisted Internet portfolio + Print media) crease in market value of $8.0 Naspers’ listed internet assets. This is in spite of $6.0 the fact that the value of $4.0 Average = $2.6bn the assets comprising the $2.0 stub has compounded $0.0 over time and is ex- ($2.0) pected to compound ($4.0) >25% well into the fu- ($6.0) ture. ($8.0) Jun-04 Jun-05 Jun-06 May-07 May-08 May-09 May-10 May-11 Apr-12 Apr-13 Apr-14 Naspers Stub Value Issue XVIII Page 31

Naspers (Continued from previous page)

Naspers’ unlisted assets (“the stub”) is comprised of attractive global businesses that are compounding >25% annually and we estimate should be valued at $20bn+ Naspers’ PayTV is a wonderful asset that is a quasi- monopoly business with 30%+ EBITDA margins, 90%+ market share in South Africa, exclusive sports and enter- tainment content and produces $1bn+ in EBITDA annually that has been growing by mid-double digits. Naspers has invested heavily to grow PayTV in Sub-Saharan Africa, where the number of subscribers is expected to more than double by 2020. We believe PayTV is worth $10bn today based on comparable multiples of other cable/tv companies and will continue to be a core growth driver of the busi- ness going forward. Naspers’ unlisted internet asset portfolio is comprised of well positioned, market leading online classified, ecommerce, marketplace and other online businesses. The company has historically provided little to no information on these assets, but through our primary research, we believe this portfolio is conservatively worth $10bn today and should compound in value at a rate of 25-50% over the next five years. In the exhib- it above, we have highlighted just a few of Naspers’ well-known internet assets that are leading internet companies in their respective markets. The value of these four internet assets accounts for 60% of the $10bn we have included in the intrin- sic value of the “stub.” Further, we estimate there to be 4-5x upside potential on these four assets alone. Naspers’ also has a whole portfolio of 120+ additional internet assets which we also believe are very attractive. For example, online classifieds are inherently winner-takes-all businesses, and Naspers has 20+ such businesses which are on the cusp on monetization and on the path of achieving EBITDA margins of 50-70%+ . The chart to the right highlights the massive monetization potential that Naspers is currently on track for in online classifieds. Naspers’ secrecy in its ownership interests is not new. For example, Naspers purchased 46% of Tencent in 2001 for $32m and did not disclose its stake until Tencent went public in 2004, when their post-money ownership in the newly listed company was >$1bn. Although it is unclear if Naspers owns the next Tencent in its portfolio, the 120+ internet assets combined with a growing PayTV business clearly are substantially mispriced at the negative $3.3bn valuation the market is currently ascribing to them. The market is currently attributing a value of negative $3.3bn to the stub, creating a wonderful opportunity to effectively get paid to own Naspers’ world class PayTV business and interests in 120+ well-positioned internet businesses in the fastest growing markets in the world

In order to exploit this massive market ineffi- LONG SHORT LONG SHORT ciency, we have outlined an illustrative transac- tion based on gross exposure of $500m (net

$440mm $440mm After After stubre $38m). Through a simple re-rating of the sta- (85% of listed asset value) (85% of listed asset value) ble and growing PayTV and unlisted Internet Payoff: $500mm $777mm +$277mm Assets to our conservative valuations, investors +738% Net $22mm

- $22mm can generate a net return of 738% (55% gross). rating… +55% Gross Over time, we only expect the stub to be be- come more valuable as its underlying assets compound rapidly, thus allowing the patient investor to generate returns in excess of these Net Position = $38mm Net Position = $315mm conservative assumptions. Implied “Stub” Value = ($3.3bn) Implied “Stub” Value = $20.5bn ($10bn Pay TV + $10bn unlisted internet + $500m Print) Risks/Mitigants Should the South African Rand (ZAR) further dislocate from the USD/HKD, the stub could widen further The cost to fully hedge against this risk is inexpensive (~1% annually today) which would only minimally impact returns The Company takes no actions to help narrow the gap Ideally for holders of the stub, the company would pursue accretive actions such as selling a portion of its interest in Tencent and simultaneously buying back shares in Naspers. Additionally, some internet assets are likely to IPO in the next few years. Lastly, increased disclosure would allow the market to better understand Naspers’ unlisted holdings. Investors may argue that a holding company discount applies in this case We believe that a substantial holding company discount is not warranted due to i) lack of tax friction associate with sale of stake, ii) we are shorting highly liquid assets with low cost of borrow, iii) highly competent management team with great capital allocation track records, and iv) ability to hedge out any currency risk Page 32 Eric Rosenfeld

(Continued from page 1) that acquisition but the day We receive ideas from Graham & Doddsville after the year was up, I left analysts. Analysts may or (G&D): How did you and started Crescendo to may not be good at finding become involved in activist focus on the most undervalued stocks, but investing? interesting and profitable they know when the parts of what we had done institutional shareholders Eric Rosenfeld (ER): at Oppenheimer, specifically are unhappy. Having While I was at Harvard deep value investing and disgruntled shareholders, Business School, I worked activist investing. shareholders that want and for a summer at Bear would support change, is a Eric Rosenfeld Stearns in their risk G&D: Can you describe requirement for us, and so arbitrage, options, and your investment process? analysts bring us ideas. interest rate futures groups. A senior person there told ER: We are really Other value investors are a me those would be the company-specific and look source of ideas, specifically three great growth areas into particular industries or value investors that buy a over the next five years. markets. The first stock and enter the “Wait, That person sure was right. requirement is to find Hope, and Pray” mode. undervalued stocks, When things don’t go their I went back to Bear’s opportunities where there way and they get frustrated, arbitrage department when I is a value gap and a they may call an activist like graduated and started difference between where us. working on takeovers – not the stock is trading and just plain vanilla types of where we think it can trade. Finally, we get ideas from situations but bidding wars, employees – either former unsolicited offers, and the One of the ways that we employees who have lost more interesting types of come up with ideas is by their jobs and think that situations. I was recruited to running screens. The most they can get their jobs back run the arbitrage important metric we look at by bringing us into the department at is probably enterprise value company or current Oppenheimer three years (“EV”) to free cash flow. employees who aren't happy later and managed both firm We also look at EV to with the direction of the capital and outside capital. EBITDA, EV to operating company or the leadership income, EPS multiples, and, of the company and feel that At Oppenheimer, we on the downside, we look at their careers will benefit focused on the more liquidation value. from having the company on interesting types of surer footing. situations – competitive We also get ideas from situations and aggressive other board members. G&D: How do you get 13Ds. There were We've been on over 20 your name out to those corporate raiders involved boards and as a result we employees or make them and we would often become personally know about 200 aware that you're out there? active in situations. We directors. Many of the influenced which company directors serve on other ER: Our name typically isn’t would end up buying boards and may suggest out there to companies we another and helped to ideas to us. They see the haven’t already identified. coordinate bidding wars. value we are able to create However, sometimes We also were activist and they’ll try to get us to people have heard about us investors. help with other companies in the news or they know with which they are somebody who was at a Fourteen years later, CIBC involved. company where we were bought Oppenheimer. I had (Continued on page 33) to stay for a year as part of IssueVolume XXI I, Issue 2 Page 33

Eric Rosenfeld

(Continued from page 32) In that particular case, we EBITDA margins used to be involved. sent a public letter to the about 14%, and we're company calling for the actually only assuming that G&D: Besides disgruntled immediate hiring of they get back to 9% or so in shareholders, what are investment bankers to start our valuation. We're not other things you look for in a sales process. And while saying that things are going an investment? the company has not sold to be as rosy as they were a itself, they did hire bankers long time ago, just that ER: We're looking for a and recently announced a they're going to be much company that's significantly financing deal with better than the trough undervalued. We're typically Sycamore Partners. earnings that you have right looking for an upside of at now. least 50% and maybe significantly in excess of that G&D: A lot of your depending on how long we activism has been focused think it's going to take to “The laws are on Canada. Can you tell our draw out that value. Our readers why you've done a average holding period is different in Canada lot of work there? slightly in excess of three years, and so, in most cases, than in the United ER: The laws are different it’s not an immediate value States and they're in Canada than in the creation. United States and they're more favorable to more favorable to Stocks may immediately shareholder democracy in increase after we surface. shareholder several respects. The most That frequently happens but important difference is that usually we get on the board democracy in if you own 5% of a Canadian and work over a period of company, you can years to bring out value. several respects. requisition a shareholder Occasionally, we'll call for The most important meeting. You can send in a the sale of a company – we letter to the board and, did that a while back with difference is that if three or four months later, Aeropostale. the whole board is up for you own 5% of a election. There are no Aeropostale is primarily a staggered boards, so the teen retailer and it also has Canadian company, whole board can be a division which caters to 4- replaced. to 12-year-olds. The you can requisition company has been having a shareholder That is a tremendously difficulty recently, as has the powerful tool for the whole sector, and we think meeting.” and it that the turnaround that helps us in negotiating with they're attempting to companies. When we're engineer would be better asking for substantial accomplished in a private representation on the setting – either under a board, the company knows financial sponsor or as a G&D: How do you think that unless we reach an smaller part of a much about normalizing EBITDA, agreement, we may very larger company – where especially for a retail well replace the whole they're clear of the public turnaround? board or virtually the whole microscope and not judged board. I think it helps us get on a quarterly basis. ER: Well, their average (Continued on page 34)

Page 34 Eric Rosenfeld

(Continued from page 33) feel they can’t get a large alternatives. At the end of to a negotiated solution, enough stake to make a this period, the regulators which we greatly prefer change. This would damage or the courts will issue a over a proxy battle, but shareholder democracy cease trade order which will when we need to have a amongst some smaller eliminate the poison pill and proxy battle we will. companies and lower the allow the offer to go value of some Canadian through. A company that is Students discuss the pitches Without shareholder stocks that may just be left put into play in Canada is at the 2014 Moon Lee Prize support, we can't negotiate Competition. to languish in their much more likely to our way onto the boards, undervalued state. transact than a company nor can we win a proxy that is put into play in the battle, and that's another Another difference is the United States. important difference poison pill or the between Canada and the shareholder's rights plan. Another important US. In the US, you generally When poison pills were first difference is that you are can't call a special meeting, introduced in the United more likely to have and when you do, you may States in 1984, the initial concentrated institutional need to own 50% or 25% of idea was that they would shareholders. In certain the company. In very rare give the board some more companies, we'll be able to cases you can do so with time to look for alternatives go out and speak to five or 10%, and virtually never can when faced with an six institutions and you call a special meeting unsolicited offer. understand what 35% to with just 5% of the stock. 45% of the shareholders are This has morphed over the thinking and whether they In most cases, you just have last 30 years to a point are willing to support us. In to wait for the company's where boards in Delaware contrast, in the US, we annual meeting, and so if can just say no to an offer might have to speak to a lot your timing is wrong, you that they don't like. You can more shareholders to find might have to wait 10 or 11 have 95% of the out what an equivalent months until you have that shareholders supporting an percentage of the vote and can have a board offer, but if the board shareholder base is thinking. level change. On top of that, chooses not to accept it, if the board is staggered, they can hide behind the G&D: Have you looked for you can only get a maximum poison pill. The bidder opportunities in other of a third of the board in would need two successful countries that share similar one year and you have to proxy fights over two years characteristics as Canada? wait another year to get the to get control of the board other third needed to gain and remove the pill. ER: No. Our view is that effective control. since there are so many It’s better in Canada than it opportunities in the United Another difference between ever was here. The view States and Canada – and Canada and the US is that a there is that, since the we're in the same time shareholder doesn't have to shareholders own the zone, we know the laws, we publicly surface until they company, they should have know the people – that own 10% of the company in the ultimate power in there’s no need to go Canada. This may change; deciding whether a company further afield. For example, there was a proposal floated is sold. If you have an why go to Japan, where you in 2013 by the CSA in unsolicited offer in Canada have a different culture and Canada to move to a 5% and the shareholders want a different language and a threshold. If they do change to accept the offer, the different time zone? It just the threshold to 5%, it may board will have several doesn't make sense to make inhibit activist campaigns months to look for (Continued on page 35) because the activist might IssueVolume XXI I, Issue 2 Page 35

Eric Rosenfeld

(Continued from page 34) manufactured their private hired a lot of high-priced it more difficult. We try to label carbonated soft drinks, branding people, and he put make it easier on ourselves, CSDs. a sign up on the wall that not harder. said, "We're not here to The company was started make money, we're here to about 60 years ago in make history." He ultimately Montreal and its succeeded at both – he Our view is that headquarters were later didn't make any money and moved to Toronto. It was a now he's history. since there are so very trusted supplier and partner with its customers, He proceeded to alienate many opportunities and CSDs were a very and compete with Cott's important category to those customers. One of the in the United States customers. Retailers products they introduced discounted Coke and Pepsi was called FortiFido. It was and Canada – and to bring people into their fortified dog water – dog we're in the same stores but they did not water with vitamins and make any significant profit minerals added – that sold time zone, we know selling them. for $1.99 a quart, and came in four flavors. Rather than the laws, we know Retailers could sell their going to Walmart, which private label soda at a lower sells more dog products the people – that price point but a much than any company in the higher margin – it was a world, Cott did this on its there’s no need to very important category to own, and tried to create a go further afield...It them – and so they would new category and a new work with Cott product. just doesn't make implementing their strategy. Customers were unhappy, sense to make it The CEO and founder of sales and profits started Cott passed away about 16 declining, and the stock more difficult. We years ago. He was replaced went from $16 to under $3. by two successive CEOs, The bonds were yielding try to make it easier each lasting a few years. over 30% at the time, and on ourselves, not Then about eight years ago, that's when we started the board hired a CEO who getting involved. We bought harder. didn't get the board to drink 8% of the company, I met the soda, he got the board with the chairman, asked for to drink the Kool-Aid. He board representation, and convinced the board that within a few weeks, we G&D: Can you talk about Cott could double its profit negotiated for four board any of your other current margins from 18% to 35% if seats out of eleven. investments or favorite past it moved a lot more into investments? brands rather than private I went on the board along label. He thought the with Greg Monahan from ER: Cott Corporation is an customers would have to Crescendo. We also interesting story. Cott is the listen to Cott and that Cott brought on a gentleman largest manufacturer of wouldn't have to listen to its who had been in senior private label beverages in customers. management at Cott five the world, and for most of years before and knew how the major retailers in the He moved the headquarters the strategy worked when it United States and Canada from Toronto to Tampa, he (Continued on page 36) and Great Britain, Cott has Page 36 Eric Rosenfeld

(Continued from page 35) largest private label a potential that this was the right strategy. Our manufacturer of juices. company could go bankrupt, fourth board member had and I have no doubt in my just retired as CEO of Cott is a good example of mind that had there not Walmart Canada and how we do what we do. been a change, they would thought it would be a great We don't get involved in the have gone into bankruptcy. challenge to help turn micro-management of the However, we thought that around the company. He company – my previous the fix was so simple that it came from Cott’s largest experience with soda was could be executed quickly customer, in one of their drinking soda. What we do enough to save the largest countries, and is make sure that the right company. brought a retailer's management team is in place perspective, a customer's (the CFO and the general G&D: You mentioned that perspective, to the board. counsel were also replaced you don't try to be at Cott), make sure that the operators but instead try to While we were in right strategy is in place, and find good management. negotiations, the existing make sure that the right What do you look for in a board fired the CEO, and is in place. good manager and how do when we came on the you think about matching a board we were immediately manager to a particular tasked with finding a new situation? CEO. We ended up promoting someone from “We don't get ER: In general, I’ve found within the company who that a good manager is was great at execution and involved in the someone who is a good hadn't been responsible for delegator – once a company setting that wrong strategy, micro-management gets large, it's pretty difficult and he's been a great CEO. to really micromanage. A of the good manager has After that, our job was to company….What confidence in his or her get the customers to love opinions but is also willing and trust Cott again. It was we do is make sure to take constructive simpler since we didn't have criticism. A good CEO to figure out a new strategy that the right works well with the board – we just had to go back to and has the trust of the the old strategy, stop management team board and the respect of competing against our the people at the company. customers, cut the is in place.” overhead that had been Knowledge of the industry built up, get rid of FortiFido, is important, but there are and take the sign off the good CEOs who have wall. moved from one industry to G&D: You mentioned another and done very, very We did all that and within Cott’s bonds were yielding well. about one and a half years, 30% which sounds like a the stock rallied to $9. The distressed situation. Do you G&D: Thank you very company has instituted a ever get concerned about much for your time. dividend and a stock buy- something like that or back program, it has consider buying debt? refinanced its debt, which is now trading around 6%, and ER: Their debt was our it has also made a large biggest concern. There was acquisition and bought the IssueVolume XXI I, Issue 2 Page 37

CBS at the Center of Women in Investing

Columbia Business School students talk to panelists at the Heilbrunn Center’s Women and Value Investing Lunch on March 6, 2014.

Current Columbia Business School students at the Cornell Columbia Business School students Women in Investing Conference in November 2013. Suhasini Bhargava ’15 and Kathy He ’15.

The CBS team presents their stock pitch at the Cornell Women in Value Investing Conference in November 2013.

For more information, please visit the Heilbrunn Center’s page on Women and Value Investing: http://www8.gsb.columbia.edu/ valueinvesting/resources/ Women_andValueInvesting Page 38 H. Kevin Byun

(Continued from page 1) G&D: How has special situ- I’ll add that there is a huge Graham & Doddsville ations investing, and your secular wave of special situ- (G&D): How did you be- style, evolved since you ations that is getting bigger. come interested in invest- launched your fund? New spin-offs are an- ing? nounced every week it HKB: Coach John Wooden seems. Pressure is building H. Kevin Byun (HKB): I used to start every basket- for increased M&A activity. had always been interested ball season by showing his There are many interesting in finance and investing but players how to put on their opportunities for special H. Kevin Byun it became very clear what I socks. The fundamentals situations investors. It’s a needed to do when I read haven’t really changed at all. very busy time. Joel Greenblatt’s first book, The framework and philoso- You Can Be a Stock Market phy has always been that of G&D: Can you talk about Genius, which is about spe- opportunistic investing. The your perspective on portfo- cial situations investing. I types of investments de- lio and risk management? had found a logical way to pends on what opportuni- find opportunities in the ties have presented them- HKB: I’ve learned that find- markets. It’s a framework selves, be it liquidations, ing great ideas and portfolio and philosophy grounded in Dutch tenders, spin-offs, management are very differ- fundamental analysis and split-offs, bankruptcies, ent skills. Both are critical. value investing. transformative M&A, et Since the start, my main cetera. There are many dif- focus was on fundamental The other equally important ferent special situations that analysis and finding great influence was Warren Buf- can arise in any sector or ideas. My conviction on the fett’s original partnership industry. You just have to value of fundamental analysis letters, which discussed be ready for them. has only gotten stronger. many of his special situa- But from experience, my tions investments in the I can speak about my evolv- view on portfolio manage- 1950s. Buffett was an activ- ing approach to special situ- ment has changed. You can ist investor as well, and peo- ations though. When I start- learn from my experience. ple forget how aggressive of ed out, I leaned more heavi- an investor he was. What I ly on quantitative analyses. I Since the start of the fund, I saw was that there was sub- could hang my hat on the had been running 50% cash stantial overlap between quantitative analysis and still from 2008-10. We made Greenblatt and Buffett's do well with that alone, solid returns every year. processes. While they were without needing the more Even in 2008 we made over effective across different qualitative feel for context 30% with no shorts, all spe- decades, I could see the and situational dynamics. cial situations. In 2011 there overlap in their fundamen- However, now I see you was a concentrated window tals. I was shocked that develop a sense and become in which many incredibly most people did not manage more efficient and effective interesting ideas had cata- their money this way, but in terms figuring out the lysts in the back half of the it’s a big world and there’s factors that will drive a par- year. I utilized more com- no one right way. My view ticular investment. Many plex options positions to was that special situations times it may simply be an express these ideas, some- investing would be my way understanding of manage- thing I had never done be- to find great ideas and pro- ment or board incentives, fore or since. That was July duce outsized returns. The which can be very powerful, 2011. What happened in great part about it was that while the numbers may hide August the next month? The they provided me with a what is really there. European financial crisis hit, clear template on how to and the market tanked. do it. It’s been working (Continued on page 39) great so far. IssueVolume XXI I, Issue 2 Page 39

H. Kevin Byun

(Continued from page 38) attended Columbia Business down. I wanted other risks It was painful at the time but School and entered the Val- removed, be it business risk, it was the best experience ue Investing Program specif- career risk, the politics, and in my career. I learned a ically because I found out so on. I wanted to build a very good lesson. I really Joel Greenblatt taught a truly independent firm that questioned everything at class there and I wanted to was structured in the right that time. I questioned the take it. In business school, I way. I wanted to take con- research process, I ques- couldn’t shake the feeling centrated positions, which tioned the portfolio man- that starting my own fund to me means holding five to agement, and I was deter- was what I had to do. Dur- ten positions at between 5% mined not to learn the ing that time, if you were to 15% each. This approach wrong lessons. When I was walking on the streets of made much more sense to reflecting on the invest- New York City and me than what I was seeing ments, I actually gained sneezed, somebody would out there. more conviction in those hand you $100 million. It ideas, and those stocks end- was that kind of weird envi- It took some time after ed up accelerating and hit- ronment that I did not think graduation to get through ting their target prices faster was sustainable. I thought it the mechanics of launching than the market. My ideas was more sustainable to be the fund and selecting ser- ultimately played out the independent for many rea- vice providers. I wanted to way I expected, but it was a sons. ensure I set up the fund the challenge to navigate right way so that it was op- through an unexpected cri- erationally efficient. Once sis. the basic blocking and tack- “That’s what ling was taken care of, I’d be That’s what portfolio man- able to focus on generating agement and hedging are portfolio returns for my investors. about. You have to be pre- pared for those unexpected management and What’s more important is events and be in a position hedging are about. how to structure the part- where you can manage nership the right way. For those risks. I’ve grown to You have to be this, I basically tore a page have a much greater appre- out of the original Buffett ciation for getting that part prepared for those partnership structure in right. Right now we have terms of the compensation about a quarter cash and in unexpected events and fee structure because it this environment it’s a good seemed more aligned to me, balance. That balance is ac- and be in a position which is a 6% hurdle and tually what allowed us to where you can above that 25% perfor- return 67% in 2013 while mance. I like the hurdle. maintaining 30% cash. 2014 manage those has been a good year so far It was really just taking a as well. risks.” bunch of simple concepts and setting them up in the G&D: You started Denali right way. I was basically Investors in 2007 shortly taking the addition by sub- after graduating from Co- I wanted my fund to focus traction approach so that lumbia Business School. Can on compounding returns when I started I had im- you describe the process and keeping my investors’ proved my chances. Also, a and challenges in starting interests as the top priority. year after I started came the your fund? The very structure of some greatest gift that an investor

funds turns this upside (Continued on page 40) HKB: I’ll start by saying I Page 40 H. Kevin Byun

(Continued from page 39) ing. You start with basic when the market dropped could have asked for, the questions, which leads to sharply but rebounded 2008 financial crisis. It was a more questions and it multi- quickly. This past week in very exceptional time to be plies. But that is the only early April, the same pat- investing. The fund did very way to get to the other side tern occurred and it is very well. where you earn the right to volatile beneath the surface. simplify appropriately. You Funds are struggling. They One of the early challenges have to go through that are reducing their gross and for me at Columbia was that difficult, frustrating stage net exposures significantly. I knew I wanted to launch a first. I remember there was You can feel that pressure fund, but I also knew I need- this forgotten room behind downwards on a lot of ed more context and better the IT department with no trendy names. That said, it is investing situational aware- windows and an industrial creating opportunity for ness. What I had learned up printer and I would print investors with cash. There to that point was just the tip out reams of filings, write- are more interesting special of the iceberg. There were ups, everything, and just sit situation names to look at skills I needed to develop. I and read through them all. now than there were last remember thinking – how year despite the markets do I get the most out of my I kept a detailed record of being higher. My focus re- time here, learn the most? my questions to ensure I mains on building the port- One of those crazy projects was diligent about getting up folio one solid idea at a I took upon myself to do the learning curve and time, but I am diligent about while at Columbia was to reaching those inflection the position level and mar- read every Value Investors points. There really wasn’t ket hedges to help get us Club write-up. I didn’t know anything magical about the through a more volatile what I was getting myself process when you’re look- environment. into. ing in from the outside. As I went through all of these G&D: How would you de- G&D: I hope there were a materials I absorbed more scribe your current pipeline, lot fewer write ups then and more investing refer- particularly in the context of than there are now. ence points, more case your 30% cash position? studies in terms of the re- HKB: There’s more than search, the analysis, and the HKB: There are roughly twice the number of write thought process. It was 400 ideas that are on our ups now because Value In- something that made a lot watch list. 40 of those 400 vestors Club started in of sense for me personally are in the pipeline, which 2000, but the one thing that and greatly accelerated my are more interesting ideas. I hadn’t factored in was the understanding. Among those 40, I’m look- Q&A section. The volume ing for one to be good of content there is impres- G&D: Contrasting 2008 to enough to replace an exist- sive, some of it very high now, what are your ing position, of which there quality. In many ways the thoughts on the market as it are ten. If the market pres- Q&A is much more valuable currently stands? sure results in another large than the write-ups them- selloff, it may create another selves. You have the write- HKB: At the beginning of window to be able to act up, which is basically adver- 2014, I sized up the position decisively. I’ve always tising, and then you have the level and market hedges viewed our cash position as Q&A critique, which helps significantly. I believed 2014 very beneficial and a key keep things honest. would be a year of height- strategic asset. My goal then was to read all ened volatility. We saw these ideas and keep learn- some of it at the end of ing whereas a lot of people January and early February, (Continued on page 41) stop because it gets frustrat- IssueVolume XXI I, Issue 2 Page 41

H. Kevin Byun

(Continued from page 40) situations is that, from point the occurrence of this up- G&D: How do you source A to point B, you have a coming event. But options and narrow down your op- clearer line of sight, in the are generally priced off portunity set? way that a sports event or a models that look backward, sports game has a start and not what’s about to happen. HKB: There are many spe- an end. This is similar in that That’s inherently very inter- cial situation opportunities we expect that a certain esting. It’s very different these days. Sourcing is event will occur over a cer- from what I think is the Professor Bruce Green- mostly following the news tain period of time. It may more common narrative wald and Alex Porter at flow and paying attention. be a spin-off, a merger, a that you’ll buy something the 2014 Moon Lee Prize Having been at this game a liquidation, or a tender, et and you don’t care where it Competition. little while, it’s a bit simpler cetera. trades because you’re look- to identify the particular ing three to five years out. We at Columbia Business drivers for each idea and to Those investments can School and the whole decide which ideas to allo- make sense and we’ve made Value Investing Communi- ty were deeply saddened cate more time to. A new them. But I believe definitive idea may be one that re- “[Idea] sourcing is to hear of the recent loss catalysts create a much of our dear friend and minds you of a previous idea higher-probability way to mostly following the thought-leader Alex or it could be an unex- extract value over time. Porter. pected opportunity. I will news flow and say it is definitely much Whether you create that Between 1976 and 1993, more work to get to fewer paying attention. through straight equity or Porter’s fund, which he names. But it’s worth it. whether you incorporate called “Amici,” generated a Having been at this options as a way to magnify net compound annual return on the order of 20 G&D: You’ve talked about the return in a cost-effective using options to structure game a little while, percent. Amici Capital manner or to skew the risk today manages $2.2 billion. interesting risk/reward sce- reward by creating certain it’s a bit simpler to Alex will not only be re- narios around special situa- hedges, there are a lot of membered for his great tions. Can you talk a bit identify the potential ways to construct success on Wall Street, more about this? the trade depending on the but also for his tremen- particular drivers pricing and availability. But dously kind and consider- HKB: The options market when you can put these ate nature. is actually quite elegant and for each idea and to multiple pieces together it’s The Heilbrunn Center will beautiful. For the ideas we much more powerful than are investing in where we decide which ideas be proud to continue just being purely a straight Alex’s generous legacy of see that the stock is mis- equity investor or being to allocate more giving back and supporting priced, by definition the purely an options investor. student ideas through the option is being priced off of time to.” Moon Lee Prize Competi- the stock so the option is G&D: Can you walk us tion, which we co-produce also inherently mispriced, through a particularly suc- with Amici Capital each but much more so. Some cessful hedging strategy? January. We feel incredi- investors may not appreci- bly grateful to have known ate the options market. Alex and he will be greatly HKB: In Q4 2011, we iden- missed by all. They also might not appre- There are some events that tified Genworth as severely ciate special situations. I’ve you know are approaching mispriced. At the time, it found that the combination and where you see a discon- was a $5 stock. We accu- of those different areas can nect between the current mulated a decent position actually create some very stock price and the appro- that comprised 10% of our powerful ways to express a priate value. holdings. As the stock dou- thesis or an investment idea. bled, I became concerned It takes a while to get a feel The market is forced to this position may start to for each of those areas. revalue that security upon (Continued on page 42) What’s great about special Page 42 H. Kevin Byun

(Continued from page 41) and its spin-off, Knowles that go into all of our overwhelm the book. I (KN). phones, tablets, laptops, and wanted to manage the in- hearing aids. Knowles owns creasing size. One way was Dover is a $15 billion mar- that space. If you think to use a stock replacement ket cap company and about the number of units strategy, in which you can Knowles is roughly $2.5 of smartphones, tablets, take 90% or 95% of the billion. Dover was trading laptops, etc., the runway is Joe Goldschmid ’14, Allen gains off the table and then close to $100 per share, but simple to understand. The Keel ’14 and Mahmud replace that with 5% or 10% dropped 10% before the ASP for a current system is Riffat ’14 present their via calls. That way you’re thesis on Cablevision spin-off when the manage- roughly $2 to $3, which will (CVC) at the 2014 Per- still getting similar exposure ment lowered guidance on increase to $4 to $6 as mo- shing Square Challenge. to a longer term thesis, but its earnings call. Then all of bile devices become more you’re managing the risk in a sudden you had the mar- sophisticated. On the cost terms of holding very large ket selloff in February, and it side, Knowles will reduce its position, and the volatility of was down another 10%. 18 facilities down to 11, that position over the short which should save it $40 to term. Now Genworth is at At the time, New Dover (ex $50 million a year. Compa- $18 so we’ve used that tac- -Knowles) was valued in the rables trade at much higher tic a number of times. mid to high $60s, and I be- valuations than Knowles. I lieved the fair value to be believe fundamentals and Another example is SunEdi- between $80 and $90. I margins will improve signifi- son from 2012. A series of thought the Knowles spin- cantly. catalysts occurred with re- off was worth at least $15 spect to SunEdison that to $20 per pre-split share. G&D: What gave you the resulted in a tripling of its After the sudden selloff, sense that Knowles’ projec- share price. I took about Dover became incredibly tions were potentially un- 40% of that position and interesting and became a derstated? placed a collar on it, keeping core position. All of this it tighter on the downside occurred when the market HKB: I thought it was in- and more room on the up- lost its mind, and the man- teresting that Knowles grew side. I didn’t want to have agement created this cover through the implosion of my investors dealing with by taking down guidance. Nokia and Blackberry sales short term capital gains Even better, the catalyst was because there were large when it wasn’t necessary. I right around the corner, customers. This is because believed there was still sig- less than one month away. Knowles is in every other nificant upside through OEM such as Samsung and carve-outs of certain enti- New Dover increased 25%, Apple. Since the NOK and ties that I expected would reaching our mid-term tar- BBRY headwind is now drive further value. But giv- get price very quickly by over, fundamentals could en the volatility in the stock, March. We exited New ramp sharply. we appropriately incorpo- Dover and rolled the pro- rated hedges to manage ceeds into the spin-off, More generally, manage- through the catalysts. Knowles, which had not ment teams are catching on moved. Knowles appears to to the benefits of spin-offs in G&D: Let’s discuss ideas. be a classic case of an or- terms of their personal in- Could you share one you phaned spin-off – it is much centives and compensation; are involved in currently? smaller than its parent com- the lower the price of the pany, has a different focus, spin-off entity, the better off HKB: One company I’ve and started with no analyst economically the manage- been following for quite coverage. But Knowles’ ment team will be as their some time and initiated a business is simple: it pro- compensation packages get position in last quarter is vides the acoustic systems (Continued on page 43) Dover Industries (DOV) IssueVolume XXI I, Issue 2 Page 43

H. Kevin Byun

(Continued from page 42) The RYAM spin-off should this was deliberately struc- struck at lower prices. In- be valued at roughly $25 to tured because Rayonier centives are powerful and $35 per share post-spin Advanced Materials is a high may compel management based on my valuation. cash flow business, and will teams to lean conservatively Based on management com- have the ability to de-lever on their numbers ahead of a ments during a conference quickly. The initial equity spin. This could be prudent, call, the dividend yield for valuation for Rayonier Ad- opportunistic, in their self- RYAM is expected to be vanced Materials will be interest, or all of the above. 1.5%, which translates very lower due to the initial lev- roughly to $0.50 per share erage. Interestingly, the G&D: Could you share on a share price of $25 to Chairman & CEO is going another $35. Management also stat- with the spin-off. Lastly, idea? ed that the total expected New Rayonier will have the “Incentives are

dividend distribution for lowest leverage by far powerful, and may HKB: Another one that I’ve both entities should be in among comparables, which been following since last line with the current divi- will be interesting for strate- compel year is Rayonier’s (RYN) dend of $2 per share. This gics. Events will beget upcoming spin-off of its spe- leaves $1.50 for the parent events. management teams cialty chemical business, company to distribute. At a Rayonier Advanced Materi- 4% yield, that already puts G&D: Is there another idea to lean als (RYAM) which is two- you in the high $30s. So you can share? thirds of Rayonier’s busi- what does that mean? If the conservatively on ness. Most of the cellulose current stock is at $45 and HKB: Well, no special situ- their numbers specialties business is in you have the spin-off that I ations conversation would cellulose acetate, which believe is worth at the mid- be complete without men- ahead of a spin. turns wood into the plastic point $30. That creates a tioning John Malone. This is fiber that is used in cigarette stub of $15 for New Ray- one of the most interesting This could be filters. It is a very high– onier which should by itself windows in the Malone era margin and attractive busi- be worth at least $30 to because we have three Lib- prudent, ness. I believe it warrants a $40. That’s interesting. erty spin-offs that are oc- much higher multiple. curring this year: Liberty opportunistic, in

Depending on how the dif- Media (LMCA), Liberty In- their self–interest, Rayonier is a timber REIT, ferent pieces initially trade teractive (LINTA), and Lib- and the timber REIT inves- we’re talking about two erty Ventures (LVNTA). or all of the above.” tor base is generally seeking entities together that are These are seemingly dispar- dividend yield. There are incredibly mispriced. The ate businesses whose value already several pure plays in reason is because the exist- will be unlocked in similar the timber space that trade ing dividend yield seeking ways. at 3.5% to 4% dividend investor base sees this cur- yields. Rayonier is currently rent Rayonier as worst-in- With Liberty Media, they’re wide of that, despite my class because of its chemi- going to create a tracking belief that its 2.6 million cals business, while the spe- stock for Liberty Broadband acres of land is of higher cialty chemicals investors (LBRDA). With respect to quality relative to its peers. are avoiding it because it’s Liberty Interactive, two new But let’s say I’m not a lum- inside a timber REIT busi- entities will be created: Lib- berjack and that’s wrong ness. erty Digital (LDCA) and and it is similar quality. Then QVC (QVCA). QVC is a it should trade in-line with Another interesting wrinkle very underappreciated busi- its peers. Well, right now is that roughly three-fourths ness. Liberty Ventures is the stock is at roughly $45 of the debt will be moved to essentially a publicly traded and the dividend per share the RYAM spin-off. That hedge fund run by John is about $2. signals a few things. I believe (Continued on page 44)

Page 44 H. Kevin Byun

(Continued from page 43) as John Malone was able to were no books in English Malone and Greg Maffei. spin off Starz at a bargain. about him. I complained to Liberty Ventures will spin- Yet Starz came out and was him that everyone here off Liberty TripAdvisor incredibly cheap and was wants to know more about Holdings (LTRPA) which trading at a very steep dis- you. By everyone I meant will hold the 22% economic count to all of its peers. We me. I said it’s crazy nothing stake and 57% voting stake bought Starz post-spin. In has been translated yet. I in TripAdvisor (TRIP) along just over a year and a half said it’s hilarious when your with the BuySeasons entity Starz more than doubled. first company sold a multi- and some debt. language pocket translator! Liberty Broadband is doing a He was deep into the Sprint Now what looked like three similar structure with a acquisition. But a few complicated companies in rights offering. What’s great months later the first book very short order will look about it is that, if you’ve ever in English shows up on very different and simplify done the background work, Amazon. I recommend Aim- into six less complicated you can get a sense of the ing High. I think the Sprint T entities. There is really no context of the events that -Mobile deal happens, by the analysis across all these enti- are coming around the cor- way. It would be great for ties particularly because ner. I believe that even to- consumers. each seemingly operates in a day these entities are trad- different industry. But the ing at substantial discounts G&D: Those sound great. way I think about it is, if you to their value with the cata- One last question, do you do the work and identify the lysts getting closer. So it’s have any advice for current key drivers for each busi- worth paying attention. students looking to enter ness, then you can identify the investment management the opportunities with the G&D: That’s a lot of tick- industry? most upside. ers, John Malone certainly likes his tax–free spin-offs. HKB: I’ve always believed I should mention that Liber- On another track, since you investing is meritocratic. ty Ventures itself is a sepa- are an avid reader, do you Your work, discipline, and ration from Liberty Interac- have any book recommen- purpose will determine tive. When Liberty Ventures dations? whether you make it. There came out, it was panned is no birthright to insight pretty heavily because it was HKB: I found it very helpful and that’s a great thing. Get perceived as an opaque enti- to read books about suc- very focused and earn your ty and began trading at $40 cessful entrepreneurs, inves- place at the table. per share. As the discount tors, and financial history. has narrowed and the NAV You can pick up a lot of G&D: Thank you for taking has increased, the stock has good ideas. Ray Kroc’s the time to speak with us, tripled. Liberty Ventures book, Grinding It Out: The Mr. Byun. also came out with a seem- Making of McDonald’s. ingly complex rights offering Another one is How to Be in the way that the separa- Rich by J. Paul Getty. One tion was structured. more is Alchemy of Finance by George Soros. Don’t let The previous spin-off of the bad titles fool you. Starz (STRZA) from Liberty Media was another interest- Last year, I began reading ing idea. John Malone was everything I could about literally giving his plan away Masayoshi Son. He is one of ahead of time. You can the greatest entrepreneurs question how someone as that ever lived. Yet there well-known and respected IssueVolume XXI I, Issue 2 Page 45 2014 Moon Lee Prize Competition

On January 31, 2014, Amici Capital hosted the 5th annual Moon Lee Prize Competition. The prize is given in memoriam of Moon Lee, a dedicated value investor with Amici Capital from 2003 to 2008, who demonstrated a tireless ability to identify and analyze deep-value opportunities that few could see. In his honor, his friends at Amici Capital initiated this competition. Finalists – who were selected based on pitches submitted by students taking a course in Applied Value Investing – included Stephen Lieu (XPO Logistics), Patrick Stadelhofer (World Acceptance Corp.), Akhil Subramanian (Pandora), and Jackson Thies (Post Hold- ings). Patrick Stadelhofer won the $15,000 first-place prize while Akhil Subramanian took home $5,000 for his second-place finish.

Jon Friedland ’97 opens the event.

Patrick Stadelhofer ’14 (first place winner) presents his thesis. Professor Bruce Greenwald asks questions.

The four finalists pose after the competition. Louisa Serene Schneider ’06 talks with alumni. Get Involved:

To hire a Columbia MBA for an internship or full-time position, contact Bruce Lloyd, Director, Employer Relations, in the Office of MBA Career Services at (212) 854-8687 or [email protected]. Available positions also may be posted directly on the Columbia website at www.gsb.columbia.edu/jobpost.

The Heilbrunn Center for Alumni Graham & Dodd Investing Alumni should sign up via the Alumni website. Click here to log in, Columbia Business School (www6.gsb.columbia.edu/alumni/emailList/showCategories.do), then go to the Uris Hall, Centers’ Suite 2M 3022 Broadway Centers and Institutes category on the E-mail Lists page. New York, NY 10027 212.854.1933 To be added to our newsletter mailing list, receive updates and news about events, or vol- [email protected] unteer for one of the many opportunities to help and advise current students, please fill out

the form below and send it in an e-mail to [email protected].

Name: ______

Company: ______Visit us on the Web The Heilbrunn Center for Graham & Dodd Investing Address: ______www.grahamanddodd.com Columbia Student Investment City: ______State: ______Zip: ______Management Association (CSIMA) http://www.csima.org/ E-mail Address: ______

Business Phone: ______

Would you like to be added to the newsletter mail list? __ Yes __ No

Contact us at: Would you like to receive e-mail updates from the Heilbrunn Center? __ Yes __ No [email protected] [email protected] [email protected]

Graham & Doddsville 2013 / 2014 Editors

Chris Brigham is a second-year MBA student and a member of the Heilbrunn Center’s Value Investing Program. Prior to Columbia Business School, he worked as an equity trader for Bank of America Merrill Lynch and as a research analyst for Tiresias Capital, an event driven hedge fund. Chris graduated Phi Kappa from Claremont McKenna College, where he received a BA in Economics. He can be reached at [email protected].

Jackson Thies is a second-year MBA student and a member of the Heilbrunn Center’s Value Investing Program. During the summer he interned at PIMCO as a high yield credit analyst. Prior to Columbia Business School, he worked in the research department at the Federal Reserve Bank of Dallas. He received a BS in Economics and Engineering from Southern Methodist University. He can be reached at [email protected].

Jason Yang is a second-year MBA student and a member of the Heilbrunn Center’s Value Investing Program. During the summer Jason interned at Development Capital Partners, a concentrated, value-oriented fund investing in sub-Saharan African equities. Prior to Columbia Business School, he worked as a consultant in PWC’s Transaction Services Strategy practice. Jason received a BS in Economics and Mathematics from Yale University. He can be reached at [email protected].