NCPA - National Center for Policy Analysis


February 27, 2006

Some speculative stock funds, called hedge funds, are now attempting to increase stock prices and boost corporate efficiency rather than takeover underperforming companies, says Businessweek. Originally, activists fought corporations at annual meetings, now they attempt to force corporations to take steps to improve their performance. Their tactics include using the media to bolster shareholder support, win Wall Street allies and follow through on threats. Furthermore, the wealth of the hedge funds helps them endure long battles with managers. As a result, the intimidated companies now surrender faster.

Consider the impact of activist hedge funds:

  • A week after an activist held an 800-person meeting attacking McDonald's, the company unveiled a plan to sell 1,500 company-owned restaurants, buy back one billion dollars of stock in the first quarter, and provide more financial disclosure.
  • Bulldog Investors LLC fought a long battle and ultimately forced Blair Corporation to sell its $174 million portfolio of receivables at a 6 percent premium; even before the transaction finished, Blair took out a loan and bought back the stakes of Bulldog and other investors at $42 a share.
  • Pershing Square Capital Management founder William A. Ackman hired Blackstone Group LP, a mergers and acquisitions advisory firm and money manager, to write a professional "fairness opinion" on the merits of restructuring plan for fast-food chain Wendy's International Inc; Wendy's adopted Ackman's proposal just a few weeks after it received Blackstone's letter and the stock has since soared 28 percent.

Nonetheless, activist hedge funds sometimes lose, says BusinessWeek. For example, Relational Investors, Sovereign Bank's largest investor, sued in order to get two board seats. On February 1, state lawmakers passed an anti-taker bill, likely preventing Relational's chance at the seats.

Source: Mara Der Hovanesian, "Attack of the Hungry Hedge Funds," BusinessWeek, February, 20, 2006.

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