Risk & Compliance

Hedge Fund Activism Gains Momentum

Hedge fund investors flex their governance muscle by forcing change at companies they control.
Stephen TaubMay 27, 2005

Relational Investors LLC is the latest hedge fund to turn up the heat on a company to force changes in board makeup, corporate governance policies, or overall operations.

Earlier this week, Relational, the largest shareholder of Sovereign Bancorp Inc., threatened to remove most of the bank’s directors unless financial and governance performance improved, reported Bloomberg.

Ralph Whitworth, who helped found Relational, says the bank could cut debt and cease making acquisitions to boost its stock price. “I told [the directors that] they were a pre-Enron board in a post-Enron world,” asserted Whitworth, according to the wire service.

Sovereign CEO Jay Sidhu, however, dismissed Relational as traders who have profited from buying and selling his company’s stock. Sidhu admitted that the bank’s loan yields and margins could be higher, telling Bloomberg: “We are striving to run a prudent, conservative organization.”

Relational is just one among a fast-growing number of hedge funds that have tried to influence corporate behavior over the past few months.

For example, earlier this month, officials at Stark Investments, a Milwaukee-based hedge fund, pressured Noranda Inc. to increase its offer to buy the remaining stake of Falconbridge Ltd., a company partly owned by Stark. Further, executives at Pembridge Capital Management told Topps Co. they plan to nominate their own slate of directors at the company’s 2005 annual meeting, according to TheDeal.com.

Also consider that Boston-based K Capital recently agreed to call off a proxy fight with OfficeMax Inc. after the retailer agreed to appoint an additional independent director to the board before and give “active consideration in good faith to a candidate or candidates” proposed by K Capital.

In April, officials at Kerr-McGee Corp. said they would buy back stock worth $4 billion as part of an agreement to end a proxy fight with Carl Icahn and JANA Partners, a hedge fund. The company also agreed to cut its dividend and sell some “shorter-life properties.” Meanwhile, Circuit City Stores Inc. rejected Boston-based Highfields Capital’s offer to take over the office-products company but later agreed to redeem its poison pill.

In March, executives at nursing home operator Beverly Enterprises said they would put the company up for sale after a group of investors, including hedge fund Appaloosa Management, offered to buy the company.

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