Is LPL Ripe for an Overhaul?
A battle over the leadership and direction of LPL may be brewing.
Activist investor Richard "Mick" McGuire and his hedge fund, Marcato Capital Management, have taken a 6.3% stake in the company, making them one of LPL's largest stakeholders. They call the stock undervalued in an SEC filing, and announced that it may initiate conversations with LPL's leaders and shareholders about company strategy.
LPL's current CEO, Mark Casady, has held the role for 11 years, during which time there has been a steady exit of potential successors among LPL's executive team.
If Marcato's history with other public companies is any indication, it's likely to push forcefully for change. Before starting his own fund, McGuire trained under Bill Ackman, the hedge fund activist famous for shorting Herbalife stock in an all-out attack against the supplement maker's leadership.
Marcato is currently pushing Sotheby's to buy back $500 million of its stock and has advocated for the ouster of its CEO. McGuire is also calling for the replacement of the Bank of New York Mellon's long-serving CEO Gerald Hassell, despite that company's strong stock performance in recent years.
By contrast, no one would call LPL's stock performance strong. It debuted at $32 five years ago and dropped from $56 in March back down to $39 last week. The stock closed at $41.55 on news of Marcato's surprise move.
McGuire, who began quietly buying up his LPL stake in late August, did not return calls to his office seeking insight into his strategy.
LEADERSHIP SHAKEUP ON THE HORIZON?
At LPL, "my guess is that [Marcato] will insist a new CEO of their choosing be installed and that a new growth and investment mandate at LPL would shortly follow," says David Selig, CEO of boutique mergers and acquisitions firm Advice Dynamics Partners in Mill Valley, Calif.
Other observers expressed similar views.
"If an investor suddenly pops up with a large stake and, without contacting the issuer beforehand, starts making noise and demands, that's certainly a sign of trouble," says Lucas Sheer, president of LS Global Advisory Group, a New York firm that conducts activist investor research for corporate clients. "A company that is undervalued with unhappy shareholders should feel vulnerable."
Whether or not Marcato spoke with LPL executives before announcing its new stake could not be immediately determined. LPL declined to answer questions about the move, saying only that it "maintains an active and ongoing dialogue with its investors and values their input as we work toward the common goal of driving stockholder value."
A former top LPL insider doesn't agree that the firm has executed on that goal.
"LPL is a growth company," the ex-insider says, but "the stock is not demonstrating those qualities. There are many brilliant things Mark has done but I believe he could run that company more economically and, therefore, [improve] profitability and move up that stock price."
LPL also has struggled with regulatory problems in recent years. In May, the San Diego-based firm paid $11.7 million in fines to FINRA for failing to adequately supervise customer accounts, among other failings
The Labor Department's fiduciary rule proposal, which would affect advisors providing certain kinds of retirement advice, could be playing a role in Marcato's new stake, thinks industry consultant Mark Hurley, CEO of Fiduciary Network, a Dallas-based financing partner for fiduciary RIAs.
"It wouldn't surprise me if this were a precursor to more consolidation in the brokerage industry," Hurley says, hinting that such a move might help precipitate an LPL buyout down the line. "This [proposed] fiduciary rule change has an enormous impact on economics. When you have disruptions, it often forces changes in strategy and changes in structure."
In an interview billed as his first-ever with the media, McGuire appeared on CNBC's "Fast Money Halftime Report" on March 10 to discuss his firm's large stake in BNY Mellon and explain why he is calling for the ouster of that CEO.
"Our view is that meaningful change and meaningful progress is very unlikely to occur without a meaningful change in leadership," McGuire told CNBC's Wall Street reporter Kate Kelly.
"Is Bank of New York really that broken?" Kelly countered, pressing him to explain why he regarded the bank stock as low, given that Hassell had doubled the price since becoming CEO in 2011, and analysts had credited him for reducing expenses.
"From 2007 to today," McGuire responded, "core revenue has increased 4% in total. That's not a compounded number. That's 4% in total. Headcount over that same time is up 22%. And these trends are things that are barely showing any signs of abating and that is signs of really poor execution on the part of management."
When discussion turned to McGuire's view of Sotheby's, he also called for a change of CEO at the venerable auction house, accusing the current executive team of "willful neglect" of the company.
ACTIVIST INFLUENCE SPREADS
Activist influence on U.S. corporations continues to grow, even as corporations hone their ability to defend against attacks, according to SharkWatch data, which tracks activist campaigns.
Through June 1 of this year, 46 non-proxy fight activist campaigns resulted in activist investors gaining a board seat – the highest number recorded since the research firm began tracking these results more than a decade ago.
"Any institution that has Marcato as a significant stockholder should take [the fund] seriously," says a lawyer who has represented activist shareholders and asked to remain anonymous for fear of breaching a conflict of interest rule. "Investors like Marcato don't commit capital to a company without significant analysis and thought."
Suleman Din contributed to this report.