Hedge funds and private equity managers have a straightforward approach in coming up with their proposals. They start from the bottom up and question everything. They have to do that to maximize value. But if they can do it, so can the companies themselves.
Hedge funds have the most success with managements that have stopped looking at their companies with the eyes of dispassionate stakeholders. They focus on situations where the market is undervaluing an aspect of the business and management is doing nothing about it.
We relied mainly on our own instincts
As for the outside advisors helping us with Paulson, they gave us good advice. But I learned that most of the “experts” really don’t know as much as you might think. They can tell you things you kind of already know if you read The Wall Street Journal. They can ask useful questions about the work you’re doing, and they can validate your plan of action. They also have their ear to the ground so they can alert you to new developments. But not much more.
With all corporate advisors, especially ones from large financial firms involved in many sides of a particular trade, you also have to keep in mind that they’re always looking ahead. They’re trying to avoid stands that make it harder for them to build relationships with other companies. They want to help you, but they don’t want to get too far out because somebody might lose some revenue. So if you let their ideas get into your head, you can end up more confused than before you talked to them.
Ironically, a sell-side analyst with our advisors’ firm actually came out with a report saying Paulson had a good plan for The Hartford. He had relied too much on the information that Paulson fed him. Our advisors were embarrassed; they claimed they had no idea because there’s a Chinese wall between the two parts of the company. But the experience just shows you how the game is played.
Instead of relying heavily on advisors, we trusted our own instincts. I pushed our team to test out the different scenarios, our current plan versus Paulson’s, not just share price but how you could divide the capital, debt and liabilities. And under those scenarios, it simply wasn’t attractive.
We drew on a strong relationship with the board
The Paulson attack could easily have split the board apart and led to my firing. That happens more times than not. Of course our board was feeling some pressure. But if you have a strong board, you can overcome the pressure and stay focused on the company’s interests.
Some of that strength came from having a couple of directors with real market savvy. They were demanding on the analysis, but they were also calm. They had been through similar ordeals in their careers.
But a big part of our strength came from all the work that the board and I had done to build trust. By 2012, we had enough respect for each other that Paulson wasn’t able to exploit existing grievances. We stayed unified.