On April 2, 2009 the following letter was sent to Diamond Hill. Excerpts
of the letter were posted on Yahoo! Message Board on April 29, 2009.
Diamond Hill
Attn: Board of Directors
325 John H. McConnell Blvd. Suite 200
Columbus, Ohio 43215
March 31, 2009
Subject: Notification of Nomination of Two Directors to the Board of
Diamond Hill
I am writing to you to express my strong disappointment in the fourth
quarter operating results of the company. Operating margins, which
have been trending lower over the last two years, in spite of
increasing revenues, fell to under 19% in the fourth quarter of 2008.
This figure is well below Mr. Dillon?s 33% target expressed at the
2007 annual meeting, even though AUM is higher now than then. The
19% operating margin is also well below the 30% operating margin that
Mr. Dillon asserted in his 2007 Shareholder Letter was the norm for
asset managers that achieve scale, which Diamond Hill has. Both
figures are below the 40% plus operating margins that the company
should be achieving if it properly compared its reported numbers to
others in the industry and adjusted for operating in a lower cost
environment (see my previous letters written in 2006 regarding the
operating margin issue).
There is no valid reason why the company did not achieve at least the
30% margins that Mr. Dillon previously felt was a reasonable split of
the economics of the business. The mentality appears to be heads
management wins, tails management wins. No matter what happens,
management is apparently going to get large bonuses, and shareholders
should be happy with whatever is left. I am all for proper
compensation and retaining talent, but to see the board swing so far
in favor of management is disappointing.
I am aware that Diamond Hill's 10-K notes the start-up costs of
Beacon Hill and accelerated stock vesting as the reasons for the
lower margins but no corresponding decline in incentive compensation.
The filing also notes that the Compensation Committee used adjusted
operating margin as the factor in the determination of incentive
compensation. The Plan allows for more categories which would have
better reflected the operating results of the company (EPS, Net
Income, Investment Performance, Operating Income, Intrinsic Value,
ROE, Return on Sales, and Revenue). Nearly all of the other
categories would have shown weaker results in 2008 versus 2007, yet
inexplicably none appear to have been used.
The fact that Diamond Hill's Board approved a higher level of
incentive compensation in 2008 versus 2007 is evidence of a failure
to incorporate the proper metrics to judge company-wide and
individual performance. Diamond Hill should have industry leading
margins due to its lower-cost location. The benefits of a low cost
operating environment should not be allocated to the employees of the
firm.
Diamond Hill has the second highest compensation cost as a percentage
of revenue of any small to mid-size publicly traded investment
management firms. The only firm higher, Epoch Holding, is
predominately a sub-advisory firm, which by nature would have a
similar cost structure in order to manage a given level of assets,
but a lower revenue base due to sub-advisors typically receiving a
smaller management fee.
Quarterly Average Compensation as % of Revenue
Company Ave. ?06 Ave. ?07 Ave. ?08 3 yr ave.
Epoch Holding 68.1% 54.1% 52.4% 58.2%
Diamond Hill 57.3% 48.5% 55.8% 53.9%
Westwood 54.5% 51.1% 51.2% 52.3%
Gabelli 41.2% 41.3% 41.7% 41.4%
Hennessy 19.6% 20.7% 35.9% 25.4%
US Global 22.4% 23.7% 28.6% 24.9%
Calamos 15.1% 19.2% 19.2% 17.9%
Source: SEC filings
The above chart used firms that are slightly smaller, near the same
size, and somewhat larger than Diamond Hill. It is surprising that a
firm based in Columbus, Ohio, is near the top of the list.
It has become apparent to me, and many fellow shareholders, that
change in the composition of the Board is needed. The existing Board
is not standing up for the company's shareholders. As a shareholder,
I am informing the Board that I nominating two people, myself and one
other, for the Board. Our goal is to represent shareholders and to
push for a fair split between owners and employees of the economics
of the business.
The nominees are:
Tim Eriksen, age 40. He is the President of Eriksen Capital
Management, LLC, an investment advisory firm he founded in 2005, and
the Managing Member of Cedar Creek Partners, LLC, a private fund.
From 2004 to 2005, he was a private investor and also wrote a bi-
monthly newsletter for Walker's Manual covering unlisted and micro-
cap stocks. From 1999 to 2004 he worked for Peter Kiewit Sons. Mr.
Eriksen received his B.A. degrees in History and Political Studies
from The Master's College in 1991and his M.B.A from Texas A&M
University in 1997.
Harry Long, age 25. Harry Long is the sole Managing Member of
Contrarian Industries, LLC, the general partner to an investment
partnership, Contrarian Partners, LP. He has a B.A. in Economics from
Rice University.
I look forward to your response. If you wish to discuss the matter,
I can be reached via email at tim@eriksencapital.com, or at (360)
354-3331.
Sincerely,
Tim Eriksen
Eriksen Capital Management
On May 5, the day the preliminary proxy filing was submitted, the
following release was posted on Eriksen Capital Management's web site:
May 04, 2009
Subject: Cedar Creek Partners to Nominate Three Directors to the
Board of Diamond Hill
Due to the continued reluctance of the Board of Directors at Diamond
Hill (nasdaq: DHIL) to pursue a proper split of the economics of the
business between shareholders and management, we believe it is
necessary to nominate three directors to the Board at the upcoming
Annual Meeting.
We are pursuing this course of action for the following reasons:
1.Despite a weaker performance by the company in 2008 versus 2007,
the Board approved an increase in incentive compensation from $12.5
million in 2007 to $13.0 million in 2008.
2.While revenues grew by $5.7 million in 2008 versus 2007,
compensation grew by $6.1 million. This is unacceptable.
3.Due to increased compensation, the company fell short of the 33%
operating margin target that CEO Ric Dillon expressed at the 2007
annual meeting even though AUM (assets under management) were higher
in 2008 than when this target was announced. Hypocritically,
management argues that it should exclude certain operations, such as
the start-up of Beacon Hill, in order to argue that it actually met
this target, yet over the last few years it refused to make similar
adjustments to other asset managers when comparing what industry
operating margins truly are.
4.We believe there is no reason why Diamond Hill cannot achieve at
least 40% operating margins based on its current size and still
fairly compensate all its employees and management.
5.Diamond Hill has the second highest compensation cost as a
percentage of revenue of any small to mid-size publicly traded
investment management firms. The only firm higher, Epoch Holding, is
predominately a sub-advisory firm, which by nature would have a
similar cost structure in order to manage a given level of assets,
but a significantly lower revenue base due to sub-advisors typically
receiving a significantly smaller management fee.
Quarterly Average Compensation as % of Revenue
Company Ave. ?06 Ave. ?07 Ave. ?08 3 yr ave.
Epoch Holding 68.1% 54.1% 52.4% 58.2%
Diamond Hill 57.3% 48.5% 55.8% 53.9%
Westwood 54.5% 51.1% 51.2% 52.3%
Gabelli 41.2% 41.3% 41.7% 41.4%
Hennessy 19.6% 20.7% 35.9% 25.4%
US Global 22.4% 23.7% 28.6% 24.9%
Calamos 15.1% 19.2% 19.2% 17.9%
Source: SEC filings
The above chart used firms that are slightly smaller, near the same
size, and somewhat larger than Diamond Hill. It is surprising that a
firm based in Columbus, Ohio, is near the top of the list.
6.We are disappointed in the Board's failure to use proper metrics to
gauge company-wide and individual performance. Diamond Hill's 10-K
filing notes that the Compensation Committee used adjusted operating
margin as the factor in the determination of incentive compensation.
The Incentive Compensation Plan allows for the use of more
categories, which would have better reflected the operating results
of the company (EPS, Net Income, Investment Performance, Operating
Income, Intrinsic Value, Return on Equity, Return on Sales, and
Revenue). Nearly all of the other categories would have shown weaker
results in 2008 versus 2007, yet inexplicably none appear to have
been used.
It has become apparent to us, and many fellow shareholders, that
change in the composition of the Board is needed. The existing Board
is not standing up for the company's shareholders, which we believe,
is reflected in the company's current stock price. Shares in Diamond
Hill trade at a discount to its industry peers on most valuation
metrics. We believe the discount is due to the issues we have noted
above. Our goal is to represent shareholders and to push for a fair
split between owners and employees of the economics of the business.
We think that this can best be accomplished by the placement of a
different viewpoint on the Board, and our intention will be to
solicit proxies and use cumulative voting to obtain as many board
seats as possible.
The nominees are:
Tim Eriksen, age 40. He is the President of Eriksen Capital
Management, LLC, an investment advisory firm he founded in 2005, and
the Managing Member of Cedar Creek Partners, LLC, a private fund.
From 2004 to 2005, he was a private investor and also wrote a bi-
monthly newsletter for Walker's Manual covering unlisted and micro-
cap stocks. From 1999 to 2004 he worked for Peter Kiewit Sons. Mr.
Eriksen received his B.A. degrees in History and Political Studies
from The Master's College in 1991and his M.B.A from Texas A&M
University in 1997.
Doug Beach, age 40. Doug Beach is The Managing Partner of Beach,
Freeman, Lim & Cleland. He has been an Advisory Director to Cedar
Creek Partners, LLC, a private fund, since 2006. From 1990 to 1995
he worked in the Tax Department at BDO Seidman, LLP. From 1995 to
2002, he was a Partner at RBZ, LLP, where he served as Partner-in-
charge of the Tax Department. He is a CPA, and is a member of the
California Society of Public Accountants. He serves on the Board for
Special Olympics Southern California, and is a member of both the
finance and audit committees. He has a B.A. from the University of
California at Los Angeles.
Steve Kirchmeier, age 40. Steve Kirchmeier is the co-Founder of
Everbridge (formerly 3n Global). He has served on the Board of
Directors of Everbridge since 2002. He has been an Advisory Director
to Cedar Creek Partners, LLC, a private fund, since 2006. He was CEO
of Starwest Public Communications from 1998 to 2002. He was Director
of Taxation at PMC Global Inc. from 1996 to 1998, and Senior Tax
Manager at BDO Seidman, LLP from 1990 to 1996. He received a Masters
of Accounting from the University of Southern California in 1991, and
a B.A. in Accounting and Management from The Master's College in
1990.
Sincerely,
Tim Eriksen
Eriksen Capital Management LLC
tim@eriksencapital.com
(360) 354-3331
Eriksen Capital Management LLC provides investment advisory services
to individual accounts and a private fund. The firm adheres to a
value approach, and seeks to purchase securities that are trading
below our estimate of intrinsic value. For those interested in
obtaining more information, please go to our web site,
www.eriksencapital.com, or call Tim Eriksen at 360-354-3331.