Barbarians and raiders increasingly play the same game

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KKR’s Alexander Navab

Around the same time in suburban Boston, EMC chief Joe Tucci met with executives from KKR. The private equity firm arrived not with its trademark buyout offer but with some news: It had quietly bought $ 250 million of EMC’s stock and had suggestions for improving the business.

The events, related by people familiar with them, show the mingling of two powerful camps on Wall Street. As private equity firms and activists compete in an increasingly crowded investing world, where more money chases fewer opportunities, their approaches are growing closer.

Activists, who traditionally buy up minority stakes then agitate for change, are increasingly attempting total takeovers or acquiring stakes at the request of management teams looking for guidance. Private equity firms, which typically do friendly buyouts, are increasingly buying non-controlling stakes in public companies, and they aren’t always letting management in on their plans ahead of time.

Both camps target underperforming companies with the aim of improving them and outperforming the market. But a rising stock market and intense competition for deals have made bargains harder to find, they say.

Competition from corporate buyers and a regulatory effort to slash the amount of debt used to fund buyouts have sent private equity firms searching for new ways to deploy cash. Activists, meanwhile, are looking for bigger targets to absorb the billions of dollars they have raised in recent years.

So far, the results are mixed. CDK rebuffed Elliott’s offer, but the hedge fund has notched gains on the company’s rising stock. EMC agreed to sell itself to Dell Inc. shortly after KKR invested, delivering a tidy profit to the firm but depriving it of the chance to test out its strategy.

“When people are struggling with how to use a particular harvest, you borrow recipes from others,” said Ash Williams, chief investment officer of Florida’s State Board of Administration, which invests in private equity and activist funds.

Private equity and activism share some DNA, though the family tree split two decades ago.

In the 1980s, a roaring junk-bond market helped Wall Street financiers chase giant corporate takeovers. Their aggressive approach earned the players an unflattering nickname: “corporate raider.”

One camp, including KKR founders Henry Kravis and George Roberts, began raising money from public pension funds, whose political ties made them squeamish about hostile deals. The investors became friendlier and more collaborative than their activist cousins, who kept the pressure on management and spawned a new generation of corporate agitators.

KKR has quietly invested $ 1 billion in “toehold” stakes in public companies over the past two years in an effort to spark divestitures or gain an edge for an eventual takeover.

It has earmarked 15% of its current $ 9 billion buyout fund for toeholds, people familiar with the matter said, and hired John Hockin, who had run a similar strategy at Golden Gate Capital. Current investments include NetScout Systems and Marvell Technology Group.

By buying public shares, KKR can more quickly seize on dips in the market. It bought EMC shares in August 2015, when stocks plunged temporarily on instability in China. Dell soon agreed to buy EMC for $ 67 billion, delivering KKR a gain.

The strategy is rife with challenges. KKR, used to having access to management and reams of confidential information, now must get comfortable investing with only what it can glean from public filings. Wary of being labeled a raider, the firm has been quick to let management know it is there.

KKR reached out to NetScout earlier this year and has met with management.

The KKR name “brings with it a certain stereotype,” said NetScout investor relations chief Andrew Kramer. “But you have to look beyond that, and we’ve found them to be a constructive, engaged shareholder.”

Other private equity firms, such as Vista Equity Partners, Golden Gate and Sycamore Partners, have used public stakes to lay groundwork for full buyouts. They are also showing up in public companies where activists already have invested.

Blackstone Group last November invested $ 820 million in automated teller-machine maker NCR, while activist Marcato Capital Management sold its stake. In December, cosmetics company Avon Products, under pressure from an activist, sold a stake to Cerberus Capital Management.

Activism is a “positive catalyst for private equity,” Alexander Navab, KKR’s head of Americas private equity, said at a Wall Street Journal conference last month.

Activists, meanwhile, are applying private equity’s special sauce—financial and operational discipline—to improve companies owned by public shareholders. Investors such as Nelson Peltz, Jeffrey Ubben and William Ackman all say they take a private equity approach to public investing, helping other public investors share in the gains.

Sometimes, they come at management’s invitation. In September, ValueAct Capital Management took a stake in Seagate Technology at the company’s request.

“They are long-term investors—three to five years,” said chief executive Stephen Luczo. “And they are really smart individuals.”

Few activists are as linked to private equity as Elliott’s Jesse Cohn, who oversees the $ 29 billion hedge fund’s activist investments.

Elliott last year launched Evergreen Coast Capital to focus on corporate buyouts and quickly signed its first deal. It has expressed interest in buying cybersecurity firm LifeLock, according to people familiar with the matter.

CDK, which makes software used by auto dealers, would have been Elliott’s biggest takeover. The company rebuffed the offer and hired a new CEO who pledged to cut costs and return capital.

The company added two directors backed by Elliott to its board. Shares are up about 13% this year.

In June, Evergreen announced its first big purchase: The software group Dell shed as it was buying EMC.

Write to David Benoit at david.benoit@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

This article was first published by The Wall Street Journal

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