Hedge fund Elliott commands attention in C-suites as relentless activist

By Svea Herbst-Bayliss

NEW YORK (Reuters) - When Elliott Investment Management buys into a company to agitate for change, bankers and lawyers who have faced the hedge fund say executives can expect a strong view on their shortcomings, backed by meticulous research and financial firepower.

Now, storied oil giant BP is in Elliott's sights. 

The investment firm, which manages $70 billion, has not disclosed the size of its stake in BP or what changes it wants to see. But the mere whiff of Elliott playing the corporate agitator this week sent BP shares to their highest since August, on expectations the fund will force improvements to unlock shareholder value. 

The day after news of Elliott's position broke, BP promised to reset its strategy as it reported weaker-than-expected results.

It was not immediately clear whether Elliott played a role in the company's move, and BP’s chief executive declined to comment on the hedge fund's investment.

Bankers and lawyers who have worked for the hedge fund or defended companies against it said Elliott is not an investor a board can ignore. The fund has built a reputation as a relentless activist, sometimes labeled as the most powerful player, but also hostile, in bankers' notes.    

On the flip side, Elliott argues its toughness will ultimately earn investors in the target company and its own portfolio bigger returns.

"Elliott's team is truly scary smart. Sometimes the emphasis is on 'smart' and other times it is on 'scary'," said Kai Liekefett, co-chair of law firm Sidley Austin's shareholder activism and corporate defense practice.

The investment firm is known for deep fact-finding on a target company, its peers and sector, possible buyers if a sale is considered.

Sometimes executives are caught off guard by Elliott's investment, lawyers and bankers said, noting a call or news article announcing a position will spark a fevered defense.

"Elliott has revived the 'ambush attack' in recent years. While Elliott and most activist investors used to first approach a target privately, nowadays Elliott often goes public right away – without any real advance warning," Sidley's Liekefett said.

Elliott, while finding its roots in founder and co-CEO Paul Singer's middle name, is not a one-man show like some other prominent activist firms. Instead the firm, which employs roughly 600, relies on a large team of portfolio managers and analysts who keep tabs on sectors ranging from energy to retail and in every part of the world.

The team prefers to stay out of the media limelight to let the work speak for itself, whether it is trying to break apart a corporate deal in Asia or a conglomerate in the United States.

But if a company resists and Elliott can't be convinced of its counterarguments, discussions can rapidly escalate into public threats of proxy battles and special meetings.

Lawyers, bankers and other investors, who know the firm well by having worked for or against it, say Elliott delivers an unmistakable message to a company: Agree with us and we'll let you take credit for positive changes, or resist and face consequences.

Many sources requested anonymity for fear of upsetting the firm. 

Elliott declined to comment.

While Elliott is officially labeled a multi-strategy hedge fund that invests in real estate, convertible bonds and sometimes buyouts, its equity activism strategy has earned the most headlines.

Last year, 15 companies were approached by Elliott, including Southwest Airlines and Starbucks, and the firm secured 12 board seats. 

Since its founding in 1977 with $1.3 million in assets, Elliott has returned roughly 13% net of fees per year, a person familiar with its performance said. Assets have doubled in the last seven years. Over the last five years, Elliott has targeted ever bigger companies, industry data show.

Elliott investors praise the firm's steady returns. While it may not match other firms' occasional eye-popping gains, it has had only two years of losses in its nearly 50-year history.    

Often Elliott's outreach is private and negotiations are conducted behind closed doors, sometimes not becoming public until they are resolved, as happened at Etsy last year when an Elliott portfolio manager joined the board.

But the firm leaves no doubt it can push ahead on its thesis for corporate overhaul even if a company rebuffs it. At Southwest Airlines, where Elliott wanted to refresh the board, review strategy and fire the CEO, the carrier eventually yielded to board-level changes, even as CEO Bob Jordan stayed put.

Elliott showed its appetite for rapid change again this week, when Reuters and other media reported the fund had increased its stake in U.S. refiner Phillips 66 to $2.5 billion from $1 billion last year.  

Phillips 66 had already laid out a performance improvement plan to boost shareholder returns and share price. Now, Elliott wants to push for operational changes and the sale of the company's midstream business as well. 

In a 2017 interview, Elliott founder Singer, now 80, told private equity executive David Rubenstein that he approves every meaningful position the firm takes.

For companies who become Elliott's activism targets, Singer said it is good to know that their executives listen "with the understanding we are real and have the capacity to carry through on our projects."           

(Reporting by Svea Herbst-Bayliss in New York with additional reporting by Anousha Sakoui in London ; Editing by Paritosh Bansal and Nia Williams)