I’ve written before about what has been an experiment for me in patient capital investing. and my conclusion at the end was to maintain my investment in Arix Bioscience. i.e., Be Patient!  

Like all investment cases, there were question marks, and perhaps the most significant one was management upheaval at the fund. Here’s where my last blog ended: “The company has never talked about a shift in strategy, it just reported its portfolio had changed.   In April 2020 two of its founder directors stepped down and at the same time, Jonathan Tobin stepped up from Investment Director to Managing Director and a new Exec Chairman was appointed.  In January 2021 Jonathan Tobin resigned as Managing Director.  There has been a new advisory panel appointed which has excellent credentials, but all this movement at the top does not inspire confidence.  What’s behind this big changing of the guard?”

On the 9^{th of} March, within days of my blog going to press, Acacia Research Corporation attacked the management of Arix, publishing an open letter to management. 

Ouch!

Acacia

Acacia started out as a specialist investment company, partnering with patent owners to maximise value for their rights, licensing and litigating over licensing.  Today it’s mandate is much broader, “acquiring undervalued businesses with a primary focus on mature technology, life sciences, industrial and certain financial services segments, and pursuing opportunities for value creation”.  This broader remit led Acacia to buy Neil Woodford’s funds’ stakes in Arix last year making Acacia Arix’ biggest shareholder with a 19% stake.  Acacia have also taken on Neil Woodford to advise!  You might consider this surprising given the bad press around the Woodford funds. However, in a fabulous twist, the administrators of the Woodford fund wind-up are now potentially being sued by investors as a number of Woodford’s biotech bets come good…just after being divested.  So, at least as a biotech investor, some vindication for Woodford.

The company clearly set out its stall as an activist investor in the letter: with a number of critical observations and direct criticism of the board, in a nutshell:

• Shareholders have been unhappy with remuneration.
• Board turnover has been high and destabilised the investment team.
• The lead non-exec has been reluctant to engage with the shareholders

Acacia then went on to propose a big shake-up and force their way into the discussion:

• Replace the CEO and strengthen the board – in part by adding two Acacia directors, and
• Don’t reinvest the VelosBio proceeds until a consultation with shareholders

Activists – a good or bad thing?

This begs the questions, what will be the outturn, and will having activists like this be positive for the company?  

Perhaps the best example of a successful activist that I can think of is Bill Ackman: his fund Pershing Square has been included in the FTSE for the first time in 2021 and you don’t have to look very far to uncover the background to his successes. The right business, sector expertise, constructive engagement and management change. We could also talk about Warren Buffett: he publicly talks about not interfering in the businesses he owns, but in several rescues of businesses he’s bought, his appointment of key personnel was defining in the success that followed.  Both these investors dramatically outperformed their benchmark over the long term.  Their activism has created great value for the investors they bring along with them.  It is interesting to read what Bill Ackman says in his 2020 letter to shareholders: 

“While it is extremely rare for a controlling interest in a truly outstanding business to be available without the payment of a large control premium, this is not the case for minority interests in the best publicly traded businesses. Just one year ago, we saw all of our holdings, which represent among the best businesses in the world, become available at massive discounts to their intrinsic values, and we took advantage of this, albeit short-term, opportunity. We have always believed that the common stocks of even the best businesses can trade at almost any price for brief periods. And it is this volatility – often driven by a disappointing short-term event, missed expectations, macro factors, political events, shareholder frustration with management and/or governance, that has enabled us to acquire large minority stakes in great businesses at bargain prices. In light of the nature of our strategy, and our long-term track record for effectuating corporate change, we have often been able to obtain influence over our portfolio holdings that is similar to that of a control shareholder, but without the need to pay a control premium. This aspect of our strategy has given us the best of both worlds, that is, the ability to own great businesses as an important and influential shareholder, and the occasional opportunity to purchase them at bargain prices in the stock market.”

Given my own concerns with the situation at Arix, I thought that Acacia could be very constructive.

So, what happened? 

Superficially nothing immediately, except an undertaking by the board to talk to Acacia, but things moved very quickly, and it shows the power that a large shareholder can have:

• 2 weeks after the open letter a £25m share buy-back programme was announced
• Six weeks after the open letter Arix published the results of their “Strategic implementation review”, completely acceding to Acacia’s demands –
• Replacing the CEO
• Appointing a new non-exec chairman
• Appointing two Acacia directors to the board
• The company’s broker Numis has been slowly buying the shares, at the current rate it should take about two years to exhaust the approval, however the company has effectively put a price cap on the buyback, so if the share price responds, it may be cancelled before then.  

The implications for me as an investor

My view is that the presence of Acacia is positive: As co-investors, their interests are absolutely aligned with mine. Management may be more focused on their own remuneration first (as investors implied when they voted in number against pay in the last couple of AGMs). Their acquisition of the portfolio and of working with Woodford seem shrewd to me.  Broader developments in the portfolio look positive too.  

There is a problem though which is that I think the complexity of this situation really highlights the challenges that face amateur investors: if you want to manage your own money, it is a lot of work to keep on top of even a fund like this, let alone a portfolio of individual stocks where you don’t have analyst support, research etc.  Maybe I should just invest (more?!) in Pershing Square?

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