Widespread shareholder activism was a hallmark of the past year. This was due in part to the rise in hedge funds and the need to generate strong returns in a low volatility environment.
Andrew Ross Sorkin in the New York Times covers the new world of shareholder activism in detail. Shareholder activism once the province of a handful of high profile names has been expanded by hedge funds with a dedicated focus on activism.
“I think that we’ve only scratched the surface on the pressure by hedge fund activist investors on companies to make changes in their business in order to increase the current price of their stock,” said Martin Lipton, the takeover lawyer who is a founding partner at the Wall Street law firm of Wachtell, Lipton, Rosen & Katz. “We have a group of activist hedge funds now where the hedge funds essentially marshal over a trillion dollars of capital, joined in by many of the traditional institutions.”
It should not be surprising to hear that more companies are interested in going private after shareholder activists have targeted their firm. The global M&A boom has certainly been driven in part by nervous corporate managements.
Shareholder activism has become decidedly mainstream. Large investment management firms, like Fidelity, have become more willing to publicly take on corporate managements. However to some it is not necessarily clear that all of this intense pressure on management is necessarily a good thing.
Mr. Lipton, for one, is dubious. “I think it’s a terrible thing for corporate America,” he said. “I think what we’re seeing is a replay of the attempt to drive American business to short-term results instead of long-term values. And ultimately it’s a tremendous threat to the vitality of our economy. I think that it’s even more dangerous than the kind of junk bond bust-up, the greenmail activity of the 70’s and early 80’s.”
Shareholder activism is not the sole province of plain vanilla public corporations. Closed-end funds have also become targets. Emma Trincal at TheStreet.com reports that a significant shareholder in the Korea Fund (KF) wants the fund’s management to shift its investment focus.
Due in part to this shareholder activism hedge funds were able to eke out a performance advantage against the S&P 500 in 2005. Emma Trincal at TheStreet.com breaks down the performance of various hedge fund strategies in 2005. Not surprisingly funds that focused on international markets had the best performance.