We recently asserted that Carl Icahn failed to win other shareholders to his eBay project because he did not publish a comprehensive analysis supporting his PayPal spinoff idea.

And, frequently investors ask us for advice about these analyses for one or another portfolio company. We certainly have read our share of white papers, too.

So, we thought it would help to set forth some thoughts about activist investing white papers.

What is the white paper?

It makes the case for change at a portfolio company, and bring together all of an investor’s ideas and analysis for the company. It can run to over 300 pages, although around 50-100 pages is more typical.

We’ve seen them include:

1. ❖background on the activist investor
   

2. ❖investment thesis
   

3. ❖strategic and competitive review
   

4. ❖financial analysis, with past and forecast performance
   

5. ❖corp gov critique
   

6. ❖BoD nominee biographies.
   

The white papers that Barington Capital and Starboard Value put together for their work at Darden exemplify the genre. Starboard also put together a good example for their project at Office Depot.

Sometimes a white paper will address a specific subject, such as Starboard’s analysis of real estate at Darden.

Nelson Peltz at Trian seems to specialize in white papers, such as his analysis of Pepsi. In fact, Trian as a separate website devoted to the subject, trianwhitepapers.com. Bill Ackman at Pershing Square also likes them, having prepared multiple ones for Herbalife, among other portfolio companies (although we exclude Herbalife from the ranks of activist investments).

Of course, investors aren’t the only ones who can write white papers. In response to Dan Loeb (Third Point) and his takedown of Sotheby’s, the company came back with it’s own harsh critique of Loeb’s past investments and BoD work. Third Point also set up the first cousin of investor white papers, an investor website (valuesothebys.com) with all sorts of other information about the situation. (Earlier, we highlighted investor websites.)

Thoughts on effective white papers

White papers have multiple audiences. Least importantly, they form the basis of discussions with company leadership. CEOs and BoDs don’t really take seriously investor ideas anyway, least of all from an activist with a small percentage of shares. Yet, sharing your analysis, critique, and plans with the company does show good faith in wanting to add value.

Note that the company will see the white paper:

1. ❖Friendly investors may send a copy to management.
   

2. ❖Proxy advisors render opinions only after each side has seen the others’ materials
   

3. ❖You’ll need to file each version as proxy materials.
   

So, develop the document expecting fully that the CEO and BoD will read it.

More than persuading management, white papers really seek to persuade other investors to support an activist’s thesis and plan. So, activists use them in meetings with other shareholders, and in proxy materials that all shareholders will see. The presentation thus answers key questions and addresses concerns and objections from other large investors.

In addition to other shareholders, activists use white papers for presentations to proxy advisors (ISS and Glass Lewis). You might need to adapt the presentation to individual advisors’ practices and preferences.

We’ve heard of investment banks preparing white papers for investors. Houlihan Lokey appears to have the largest practice, although Moelis also does this. While you might delegate the dirty work of compiling data, running models, and writing and rewriting endless pages, in the end you need to own the work.

Why do it?

Who reads these 300 page manifestos, anyway?

We know that at least a few shareholders do. And, the proxy advisors always read them thoroughly. But, even the biggest shareholders might not have time to plough through, critically, your finely-crafted assessment.

Overall, it doesn’t really matter who actually reads it. But, it matters that you’ve put the time, energy, and thought into your case for the company, and that others know it. Other shareholders might not read the white paper. They do want to know that the shareholder that wants to put directors on the BoD, or restructure the balance sheet, or break up the company, has enough to say, and thought about it it enough, that it takes 300 pages to say it.