Following Roaring Blue Lion’s most recent misstep in their proxy contest with HomeStreet (Nasdaq:HMST), I was hoping to be able to write that, while winning this battle (like so many before it), HomeStreet had lost the war (albeit more due to the fact that the obvious and predictable shortcomings of its business model can no longer be ignored rather than Roaring Blue Lion’s powers of persuasion). Unfortunately, not only did HomeStreet win all the battles, but it seems like they also won the war.
Obviously, as John Blutarsky once pointed out, it wasn’t over when the Germans bombed Pearl Harbor, so Roaring Blue Lion could (and should) immediately start to agitate for a sale, but they might not have the vision and fortitude you only get from seven years of college.
Roaring Blue Lion’s failure, however, is our opportunity and serves as a good object lesson with respect to a few fundamental points that I think are critical to successful activism with banks.
First, stock selection is key. Obviously, there needs to be both (i) some amount of underperformance and (ii) some clear root cause or causes for that underperformance, but there also has to be some sort of reasonably achievable fix and some inherent franchise value. As to the latter, the extent of HomeStreet’s inherent franchise value is uncertain at best and, as to the former, my sense is that most investors viewed fixing HomeStreet’s business model as a near impossible task and certainly not anything likely to result in a near term increase in stockholder value.
Second, have a clear and compelling message/value proposition. Some obvious examples of this are asking a bank with limited prospects (and for whom there are a number of capable and willing buyers) to sell, asking a bank with way too much capital to return it to stockholders, et cetera. In the case of Roaring Blue Lion, not only was the message not all that clear—they did not offer much in the way of specifics for mitigating HomeStreet’s dependence on mortgage and speeding the buildout of the commercial and consumer business—but it also wasn’t particularly compelling. Even if Roaring Blue Lion was able to put some directors on HomeStreet’s board, it is extremely unclear as to (i) whether Roaring Blue Lion’s directors would have had any ability to mitigate the effects of HomeStreet’s overdependence on mortgage and speed the buildout of the commercial and consumer business, (ii) whether that type of radical transformation is even possible and, even to the extent it was successful, (iii) what the actual benefits to stockholders would be and when they might be realized.
Finally, execution and professionalism matter. Without rehashing all the gory details, executing on its activist strategy was clearly a challenge for Roaring Blue Lion. Even if Roaring Blue Lion had delivered on the two points above (which they did not), my sense is that their seemingly limitless ability to find and then step on a procedural landmine would have severely hampered their ability to successfully agitate for any changes that would enhance stockholder value.
Leaving Roaring Blue Lion’s misadventure with HomeStreet aside, the banking sector remains ripe for activism. The keys to success, in my opinion, are (i) picking a bank that has real franchise value (ii) that is not fully reflected in its current stock price (iii) where there is a relatively uncomplicated fix (iv) that would create immediate value for all stockholders.