Risk & Compliance

Getting Smaller, but Not Quieter

If you thought hedge funds' troubles mean they'll give up on shareholder activism, think again.
Josh HyattFebruary 1, 2009

The world of high finance had already been brought low before the Madoff scandal rocked Wall Street in December. Even so, corporate finance officers shouldn’t write off the hedge-fund industry, which still serves as a hotbed of activist investors. “The activists aren’t going anywhere,” warns Jeffrey Morgan, president and CEO of the National Investor Relations Institute.

Hedge-fund assets peaked at $1.9 trillion at the start of last year, but were already down 28 percent when federal prosecutors charged Bernard Madoff with fraud, according to a report by Finadium, a financial-services consulting firm. Josh Galper, Finadium’s managing principal, expects the industry to shrink another 10 percent by this fall as a result of redemptions and market losses.

While pension funds and endowments may be eager to cut their ties to hedge funds, the funds still appeal to risk-taking investors looking for undervalued companies. Such investors are likely to flock to the bigger hedge funds, which often rely on leverage to snap up shares of a targeted company, and then agitate from their board seats for changes aimed at unlocking previously hidden value — changing the CEO, for example. Activist efforts are likely to increase this year, predicts Damien Park, president and CEO of Hedge Fund Solutions, a strategy firm that studies shareholder activism. “There are a lot of undervalued companies.”

The biggest change that CFOs may see is a strategic one. In light of rampant liquidity problems, “we will see a shift from activism campaigns based on financial issues to campaigns pursuing a number of strategic and organizational corrections,” predicts Matteo Tonello, associate director of corporate governance for The Conference Board and author of a recent report on the topic. Activists might demand that a company divest noncore assets and use the proceeds to shore up the main business, for example.

“The industry will be smaller, but that doesn’t mean that CFOs and IR professionals can sit on their hands,” says Morgan. “They are going to have to be as proactive as ever.” Maybe more so.

Some of the well-known businesses that attracted — and reacted to — activist shareholders recently
Target Company Activists Outcome
Brink’s Security,
of armored truck fame
Steel Partners
and MMI Investors
In October 2008, under threat of a proxy battle, Brink’s spun off its home-security division into a separate public company.
H&R Block,
tax preparer
Former SEC chairman
Richard Breeden, Breeden Capital Management
Breeden won three board seats. Last August, company sold brokerage business for $315 million in cash.
BEA Systems,
software giant
Carl Icahn, best known for his 1980s career as a corporate raider (TWA, Texaco, etc.) In January 2008, Oracle bought the company in an $8.5 billion deal.
Source: 13D Monitor