The past several months bears witness to a dramatic rise in aggressive hedge fund activist attacks. This activism is not directed solely toward small, weak or poorly managed companies as one might expect. On the contrary, large, respected, successful enterprises are prime targets. Examples include Amgen, Sony, Proctor & Gamble, DuPont and Qualcomm to cite a few.
No fewer than 100 hedge funds are, or have recently engaged, in activism. Collectively, they have more than $200 billion in assets under management. These funds are highly sophisticated and increasingly experienced with analysts, traders and senior management on a par with the top investment banks.
These elite professionals craft persuasive white papers regarding a target corporation’s management, operations, capital structure or some combination thereof, to support their alternative strategy to increase shareholder value. For example, an alternative strategy may be a share buyback, an acquisition, or spin-off.
Corporations Fight Back
In a spirit reminiscent of the unofficial U.S. Marine slogan, Improvise, Adapt and Overcome, many corporations have undertaken proactive measures to counter possible activist attacks, should they occur. Forward looking CEOs and CFOs have created teams which usually include key officers, corporate counsel, a proxy soliciting firm and a public relations agency which meet regularly and even conduct “fire drills” to enhance their state of preparedness.
Other measures include implementing a stock watch service, monitoring 13F, 13D, 13G and Hart-Scott-Rodino Act filings. Parallel trading and activity in options, derivatives, corporate debt and similar non-equity securities can provide a heads-up to corporate executives.
Equally important, Boards of Directors are being made aware of activist tactics. Corporations have learned that a divided board can spell disaster when an activist-attack surfaces. Any daylight between the board and management will be exploited by an activist fund. For this reason, management keeps the board well-informed, providing them the necessary data to guard against activist subversion.
There Is No Downside
For corporations taking a proactive approach, there is no downside. As a result of hedge fund activism, corporations are paying closer attention to virtually every facet of business operations. Directors are better informed; shareholders are treated with greater deference, business strategies are thoroughly assessed, leverage is monitored closely, meaningful director evaluations are being made and public relations are effectively executed.
Corporate preparedness for an activist event is a combination of art and science. Activist hedge funds have forced corporations to review strategies, governance, executive compensation, director quality and a host of other business functions.
Although this makes life more difficult for activist hedge funds, the end result is in every shareholder’s best interest: competently run enterprises!
Broadly speaking, activist hedge funds are regarded as a dark force. Activism is viewed as a negative strategy fostering little more than ill will, creating an unwelcome diversion from what the target corporation should be doing, which is running its business. However, corporations that have taken a proactive stance, have benefited from the threat activism poses. They have discovered their vulnerabilities and taken corrective action.
Hedge funds work their magic in mysterious ways.