Iron Mountain hit by hedge fund attack Data-vaulting company Iron Mountain has been hit by a hedge fund shareholder attack that accuses management of disastrous forays into digital data storage and international expansion. It should become a real estate-focused company delivering cash to shareholders instead of wasting it on fruitless growth ambitions, says the fund …
So the hedge fund, being the savy businessmen that they are (not), think that growing the business is a bad thing. Hedge funds often can't see past their noses, they are not business-people in the sense of providing goods and services to consumers at a profit, they are financial business-people, looking for a return on their investment as quickly as possible. This often translates into breaking up a company and selling it off in pieces to "real" business people.
Shareholders benefit when the company makes a profit, but sustainable growth and profitability are not necessarily the aim of a hedge-fund, they like quick returns. This kind of thinking leads to short term profits, one-shot deals (like a certain Finnish company getting a huge cash injection from a certain U.S. based software firm) but more often than not result in long-term decline into oblivion.
...a "hedge" fund, as the name implies, is about "hedging", i.e. offsetting risks in share pricing or other instruments. They are not into "breaking up companies" [that's what companies doing Leveraged Buyouts do, a weird practice that became possible once Government thought it might be a good idea to flood the economy with easy credit] or dictating strategic decisions. Or at least they should not.
I think the most important point to make here, Chris, is that Paul Singer is attempting to persuade Iron Mountain--via its shareholders--to engage in a VERY questionable practice of tax evasion. It is, as far as I am aware, still a legal loophole in at least a third of the States, but one that has already landed companies such as Wal-Mart in Court. In fact Wal-Mart lost to the State of North Carolina, or more accurately the company involuntarily refunded $33 million in taxes it had avoided with the distorted use of an REIT.
See: http://walmartwatch.com/wp-content/blogs.dir/2/files/pdf/state_tax_avoidance.pdf
For at least the past 10 years States have been actively working to close the loopholes that allow companies to form tax-exempt REITs and rent their own property to themselves to reduce tax obligations and recycle the funds back to the company and its other shareholders. REITs were originally designed with small investors in mind, not to be abused by large corporations to avoid taxation.
So Singer basically wants to push Brennan and Iron Mountain into a risky tax evasion scheme for the benefit of shareholders. Certainly not for the long-term benefit of Iron Mountain's customers. And very likely to land Iron Mountain in Court in more than one State. According to precedent, it's a battle Iron Mountain would eventually lose.
So what said hedgie is proposing the that Iron Mountain splits into an operating company and property company. A few thoughts.
Its an old idea, very popular in the times of rising property prices and freely available leverage - not where we find our selves right now or for the foreseeable.
the strategy only really works if you lever up the propco through sale and leaseback or similar transactions - again unlikely right now.
The two biggest uk companies that did it, enterprise inns and punch taverns, well take a look a the share price over a five year period. Not what I want happening as an investor.
Seen Robert and Vincent Tchenguiz in the news recently? They spent years pushing uk companies to try and do these kind of transactions, currently helping the SFO with their enquiries....
So to summarize, Hedgie ought to start looking for a new career because I think his investors will be wanting their money back . Stale old ideas like this are not going to get much traction or indeed generate much in the way of returns.
As an aside, my sense is that data de-duplication and the use of onsite disk arrays for short term backup is likely to lead to a reduce volume of business for Iron Mountain in the vaulting business. This is just the view of an amateur geek though. Any infrastructure bods care to pass an informed comment?
Which makes the hedge fund even more despicable.
Currently de-dupe mostly only cuts the volume of backup data, not working data. Even when it does get applied to more working data, it won't have the same dramatic effect on volumes.
IM makes money storing paper and backup tapes. Paper will die. Tape won't, because it's great for long term storage. But eventually companies will stop trucking backup tapes to Iron Mountain, and instead they will send that data to public storage clouds over the wire. As data volumes continue to balloon, they will also very likely start sending archive and infrequently acessed working data to public clouds, to lighten the load on their on-premise disks.
Iron Mountain is very sensibly trying to anticipate that change, and make sure that it becomes one of those public clouds. Ok, the ediscovery lost money, but that's actually a different business, which is about manipulating data and not just storing it.
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