Our premise is simple: we bought Tessera because the stock was cheap and we received nearly free optionality on either the development of a new technology or improvement in the managing of the core business.
In a very short period of time, the management team members proved themselves to be some combination of incompetent, careless or clueless. We have been BLESSED with the entrance of what appears to be a competent group of investors—Starboard Value—who have experience in real activism and have in short order produced the departure of the CEO and most of the Board, a nearly complete makeover of the Board (proposed) and the announcement of a restructuring plan that should radically cut costs and shift capital allocation to enhance profitability and returns.
The choice before shareholders is simple and somewhat unusual. We can vote for a brand new board with an interim CEO that promises change for the benefit of shareholders…or we can vote for a brand new board with an interim CEO who promises change for the benefit of shareholders! In other words, Starboard has so shaken up things that the “incumbent’ slate has no incumbency—it will include almost all new people.
We have spoken at length with the new interim CEO, Rick Hill. He is an experienced and successful ex-CEO whose directness and competence have been directly vouched for by a number of our contacts. We have spoken at length with the people at Starboard—who seem rational and have offered a board slate that is perfectly pedigreed.
With the future uncertain and promises being nothing but promises, the choice is fiendishly simple: go with the group with skin in the game. Starboard owns 8% of the company and is an investment manager who desires both reputational success and the cold hard cash that comes with incentive compensation. Rick is coming out of retirement, cannot improve his lifestyle with a tripling of this stock and the Board owns no stock.
As Mr. Munger once noted:
And, as usual in human affairs, what determines the behavior are incentives for the decision maker.
From all business, my favorite case on incentives is Federal Express. The heart and soul of their system—which creates the integrity of the product—is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers.
And it was always screwed up. They could never get it done on time. They tried everything— moral suasion, threats, you name it. And nothing worked.
Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift—and when it’s all done, they can all go home. Well, their problems cleared up overnight.
So getting the incentives right is a very, very important lesson. It was not obvious to Federal Express what the solution was. But maybe now, it will hereafter more often be obvious to you.
Vote Early and Vote Often…
Related: Proxy Season and the Unusually Juicy Soap Opera at Tessera
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