A plucky young hedge fund manager publicly exhorts the management of a well-known U.S. retailer to get with the program and boost the company’s lagging share price by spinning off its real estate holdings.
The company ignores him.
So the manager raises the roof again — to no avail. And once or twice more after that. Still the retailer ignores him. The manager takes his show on the road, makes his pitch in the press, riles up shareholders and hews to his line of attack. The company digs in its heels. The manager still will not shut up.
It sounds like a saga from the corporate raider era of the 1980s but, in truth, is taken from this year’s headlines, written against the backdrop of a recession-battered economy in which some corporate boards are far more beholden to government bailouts than to activist shareholders. The hedge fund manager here is William Ackman, the 42-year-old chief executive of New York–based Pershing Square Capital Management, who this year launched a proxy fight to get his slate appointed to the board of directors of Target Corp.
Ackman has been arguing for months that the U.S.’s sixth-largest retailer, as measured by revenue, can unlock value by creating a real estate investment trust that would control the land under its many stores. The company could spin off 20 percent of the REIT, as Ackman envisions it, in an initial public offering and then use the proceeds to pay down its billions in debt. Beyond being notable for its creativity, his recent activism is also worth mentioning in part because it’s something of a cry in the wilderness.
As recently as last year, hedge fund activism was comparatively alive and well, and strategies like Ackman’s weren’t uncommon. But investor activism today is clearly not what it was, either in scope or strategy.
“The activist managers are still around,” says Lynn Turner, a former chief accountant at the Securities and Exchange Commission who is now a San Francisco–based expert in forensic accounting and corporate governance for global investment consulting firm LECG. “But there are simply not a lot of things they can do with a company that they could do back in 2005 and 2006.”
Hedge fund managers like Ackman have a well-deserved reputation for raising the corporate roof. From 2006 through 2008, hedge funds were responsible for at least half of all official acts of shareholder activism — 13D filings, proxy fights, press releases — according to FactSet Research Systems, a firm that tracks the information that investment managers file with the SEC. But during the first few months of this year, hedge funds accounted for only 20 percent of such activities. (Activism in general is down: Through April 16, FactSet recorded 118 activist campaigns against U.S. companies this year, compared with 172 during the same period in 2008.)
“The drop-off in activity from hedge funds is definitely affecting the level of shareholder activism overall this year,” says John Laide, an analyst with FactSet. “The most prominent hedge fund activists haven’t announced much in a long time.”
One of the chief reasons for the lull is that activism takes money, which is in short supply these days, although there’s also the fact that the U.S. government almost overnight has become the mother of all activist investors. An argument can be made that individual and institutional investors have provided competition too. The $165 billion California Public Employees’ Retirement System, for instance, was instrumental in forcing a shareholder vote to oust Kenneth Lewis as chairman of Bank of America Corp. (though he remains chief executive). Form 14a-8 filings, which signal when a small shareholder wants his or her input to appear in an annual-meeting proxy, have been on the rise. There were 581 filed during the first four months of this year, compared with 546 during the comparable period in 2008, according to FactSet.
But among the biggest reasons for the slowdown in big-name activism is that returns haven’t been particularly good the past year or two, and some hedge funds have had sizable redemptions.
Today many of the usual players are laying low — including hedge fund managers Christopher Hohn, Daniel Loeb and Robert Chapman Jr. — and they may well continue to do so. Though the silence isn’t mourned by corporate CEOs, most investors would agree that it’s not necessarily a good thing to lose marketplace watchdogs, even if they are self-serving ones.
The slowdown suggests the possibility that a makeover in strategy is in progress. The price of activism may be coming down as technology allows for new ways to rock the boat, and public relations campaigns can be effective and don’t cost much. It doesn’t cost much, either, for an investor to approach a company courteously rather than antagonistically, and some activists see the potential for more civility.
“The year ahead will involve not threatening the proxy fight unless you’re willing to wage it and fight to the very end,” says Bruce Goldfarb, CEO of New York–based Okapi Partners, a proxy-solicitation firm. “The economic reality of the past year means certain activists will think harder about how and when to wage a fight.”
“Shareholder activism is not dead,” notes David Katz, a partner at New York law firm Wachtell, Lipton, Rosen & Katz who specializes in hostile takeovers and proxy contests. “But we’ll see less of it because fewer parties can afford to play in that arena.”
Hard times is what it’s all about, agrees Phillip Goldstein, 63, founder of $260 million Saddle Brook, New Jersey–based Bulldog Investments. “It’s like being in the store where everything’s 80 percent off but you have just $2 in your pocket,” he says.
“That said, there are deals to get done,” Goldstein adds. “The idea that you can leverage up a company and sell it is not an option now. There are measures that can be taken to increase the value of stock. No reason not to — so long as you have the firepower.”
Goldstein is currently waging a successful fight with Newark, New Jersey–based Wilshire Enterprises, a small publicly listed real estate company. “The stock is down 80 percent from its peak, and we’ve got three proxy services supporting us,” Goldstein says. “The company’s performance is so bad that it makes it easier to gain the support of the passive shareholders.” In May, Bulldog approved Wilshire’s slate of directors in exchange for the company’s agreeing to buy back 4 million of its outstanding shares for at least $2 a share.
But when most hedge fund managers known for activism do anything in public now, it’s likely to be in the vein of an announcement by activist Warren Lichtenstein, 40, of $7 billion, New York–based Steel Partners. In a January letter he informed investors that he was taking his main hedge fund public and that nobody could get their money out. Barry Rosenstein, 50, the activist founder of $5 billion JANA Partners in New York, has said he has been hurt by investors seeking liquidity and that activism strategies are changing, though he has said little about how.
One sign of the times is the recent and radical turn of events at Children’s Investment Fund Management (UK), the $11 billion, London-based hedge fund run by Hohn (“Chris Hohn Rethinks Chris Hohn,” September 2008). Hohn, 42, teamed up with Timothy Barakett, founder of $17.5 billion, New York–based Atticus Capital, to stage one of the most high-profile activist campaigns ever waged when their two funds scuttled Deutsche Börse’s effort in 2005 to acquire the London Stock Exchange, forcing the eventual removal of two chairmen and a CEO from the German stock exchange operator. Yet that fight ended in a whimper: In late March, Atticus announced that it had sold the bulk of its stake in Deutsche Börse, and Hohn has gone quiet.
So has Chapman, 41, whose fans must miss his occasional rant. His latest filing, a document that dryly lists El Segundo, California–based Chapman Capital’s ownership stake in New York entertainment company EDCI Holdings (where Chapman has been the CEO since January), is a far cry from the scathing letters he used to attach to his 13D filings. Consider Chapman’s letter to the management of Vitesse Semiconductor Corp. in the summer of 2006, in which he proclaims his intention “to initiate a full-scale investigation of [Vitesse and its board], utilizing an in-house private investigator (and former Marine who has returned from battle in the Balkans), who will be directed to shadow your past, present and prospective activities as they potentially affect our ownership interest in the company.”
Loeb, 46, founder of $2 billion activist-investment firm Third Point, based in New York, is also maintaining radio silence these days (he too is known for his bombastic missives to CEOs and underperforming companies).
That leaves Ackman as one of the very few hedge fund activists still strutting his stuff. Target has fought off his advances, however, and Ackman’s efforts have largely been for naught (the outcome was to be determined at a Target shareholder meeting at the end of May). The Pershing Square fund set up to invest in Target was off 68 percent last year.
Even old-school activist titans like Carl Icahn, 73, and T. Boone Pickens, 81, are reeling. After watching the share price of his largest single investment, Motorola, tank (down 80 percent since October 2006), Icahn, whose Icahn Enterprises stock price in mid-May was off about 70 percent from a year earlier, tried to persuade executives at Internet pioneer Yahoo! and drugmaker Biogen Idec to institute changes, but they resisted. And Pickens had a horrible year: His Dallas-based BP Capital, rich in energy holdings, at one point in 2008 had lost 97 percent of its value.
“The stock market sell-off has been quite general, and nobody has escaped it,” notes Ralph Whitworth, 53, the activist chairman of Relational Investors, a San Diego–based registered investment adviser with about $7 billion in assets under management. “But it’s much more discriminating on the way back up. That’s why there’s a huge amount of work to be done by investors in corporate America. It just needs to go to the next level.”
Whitworth, who is not a hedge fund manager, says that although activism seems to have waned, it is “more critical now than ever.” He is an advocate of an ideal in which every corporate board would reserve one seat for an independent director with a big stake in the company. Such a system would bring fresh and valuable perspective to corporate governance, but Whitworth acknowledges that the sheer scale of such an undertaking ensures that it will probably never happen.
The alternative? “Investors like me who are as proactive as they can be.”
Beyond the entrenched corporate traditions that serve as passive hurdles to activism is the overt resistance sometimes raised. “Activism has become a term of abuse in some quarters — remember the German politicians calling activists ‘locusts’ for challenging Deutsche Börse?” says Anne Simpson, CalPERS’s senior portfolio manager for corporate governance.
On the other hand, activists have gotten flak from investors too. “It has become a case of damned if you do, and damned if you don’t,” Simpson says. She says she wonders if shareholders — activists included — are ultimately responsible for the collapse of two of Detroit’s Big Three automakers for not getting rid of incompetent boards of directors years ago (Chrysler Corp. filed for bankruptcy court protection on April 30, and General Motors Corp. could soon follow). But part of the problem, she notes, is that shareholders don’t have enough heft and that it’s notoriously difficult to remove and replace directors — and punitively expensive.
This may change, says Jeffrey Gordon, a professor of corporate law at Columbia Law School, thanks to electronic proxies, which are replacing the old-fashioned paper forms. Gordon and others like electronic proxies because they’re cheap and easy to use and as such represent a potential democratization of corporate governance. The e-proxy movement, Gordon notes, allows any small shareholder with an Internet connection to rock the boat almost as vociferously as well-heeled shareholders: “It’s a low-cost way of maintaining an independent proxy contest.”
Another inexpensive way to take on a company is by conquering it with kindness, argues Alexander Roepers, 50, president of $4.2 billion, New York–based Atlantic Investment Management (see “The Gentleman Activist,” July/August 2008). Roepers is known for his polite missives to companies in which he holds a stake. “We continue to write a lot of letters,” he says. “We’re never going to look for a seat on the board or engage in a proxy battle, things that help a firm become illiquid. We prefer to maintain a reasonable dialogue with a company to advance our cause. This is different from the more publicly known activists out there.”
What has changed, according to Roepers, is that more activists are trying harder than before to be less confrontational. “When I show up, whether it’s in a mining company or anywhere else, my proposals get looked at quickly,” he says. “They’ve known me for a long time and know I’m someone they can work with. I’m an unpaid consultant from that perspective.”
Roepers agrees with Goldstein, the Bulldog activist, that the market is stocked like a bargain basement candy store. But he says there remains a lack of transparency, and he fears the worst is yet to come in some cases. Many investment-grade companies still have too much hidden debt, he warns.
Goldfarb, the Okapi Partners CEO, thinks his proxy-solicitation practice will be dealing with more “say on pay” initiatives — shareholder challenges to executive compensation — in the coming year. “There are two types of shareholder activists: the economic type and the corporate governance type,” he says. “Say-on-pay is the second type, but it has a lot of resonance. Corporate governance champions are heartened by the Obama election, [thinking] that it’s going to become part of his legislative agenda.”
And Goldfarb says derivatives-driven activism, in which investors such as Ackman take an indirect stake in a company using swap agreements or options, won’t be the force it was in 2008. “It comes to the availability of lending shares,” he explains.
CalPERS’s Simpson thinks that basic public relations campaigns may well become the major currency of activism.
“If companies are worried about feeling the hot breath of activists on their neck, then they need to start communicating with their silent majority, those long-term owners who have a shared interest in seeing the company prosper,” she says. “It’s simply too late to start the charm offensive when the hedge funds are at the gate.”
