Gods at War by Steven M. Davidoff

Author:Steven M. Davidoff
Language: eng
Format: epub
Publisher: Wiley

The Future of Hedge Fund Activism

The Jana and Children’s battles show the perils and potential of hedge fund investing. In both instances, the companies appeared to have limited defenses and lagging historical performance against their peers. In Jana’s case, a nice, quick profit was also had. Companies saw these dissident contests and, aware of their own vulnerabilities, responded. But they did not do so with welcoming arms or corporate restructuring and reform. Rather, most companies responded by adopting amendments to their bylaws to impose significantly increased shareholder disclosure and other restrictions on shareholder activism.

These actions will probably have their intended result and chill activity. Companies argue that these measures prevent short-termism. However, hedge fund activity has resulted in increased shareholder value and reduced excessive executive pay. Thus, the battle over hedge fund shareholder activism seems more about hedge fund tactics than about their results. Here, the recommendation of RiskMetrics in the CSX battle is likely to affect companies’ response. Although companies may arm themselves and even attempt to fight off hedge fund activism, they will probably do so in a manner that appears to be at least receptive to the ideas of their new hedge fund shareholders.The consequence is to again make the public relations campaign, and the choice of a PR firm, one of the central elements in these battles.

Hedge funds may become a more sustained force, but there are countervailing trends that probably mean they are unlikely to become ubiquitous. First, there are a limited number of easy targets. Second, activist hedge funds have been terribly hurt by the financial crisis. These funds typically invest in distressed companies to begin with, and the returns in 2008 were not pretty on account of the exacerbated impact of the financial crisis. Children’s results were negative 42.8 percent for the year.49 Most spectacularly, Bill Ackman’s specialized $2 billion fund to invest as an activist shareholder in retailer Target Corp. lost 89.5 percent of its value in less than two years.50 These are hardly encouraging returns to fund significant expansion, despite the increased opportunity. In the wake of these returns and the financial crisis, many funds were also hit by investor redemptions, and Jana alone was rumored to have redemption requests for 20 to 30 percent of its assets.51 These hits are likely to set back the growth of these funds by several years and may result in the liquidation of many funds.

Still, despite the general economic downturn and the huge losses sustained by many corporate activist funds, the 2009 proxy season experienced the sustained activity of 2008. As of March 25, 2009, there were already more shareholder proposals than in the comparable period a year ago. So far, 283 shareholder proposals were disclosed, compared with 252 for the same period last proxy season. In the most contentious arena, proxy contests, it appears that as of March, the pace was set to surpass 2008’s record total. As of March 25, 2009, 71 proxy fights for board seats at U.S. companies have been announced.

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