6/28/17

Hi monkeys,

Can one of you explain why activist hedge funds are supposedly so feared by F500 companies? Why does a F500 CEO care so much about what a 5% shareholder wants that it requires him/her to devote a majority of their time responding to their arguments? I've read several articles in the Economist and WSJ as well as spoken to a few bankers but no-one has been able to provide me with a persuasive argument. I'm sure that WSO can provide this insight.

Comments (15)

6/26/17

You kind of answered your own questions, but activist funds are very, very disruptive. First of all, they usually present a pretty good case to the market as to why the CEO / management team suck (there wouldn't be opportunities for activism without bad management). Then they ask (and usually get) board seats, in effect becoming the CEO's bosses (again, no leader wants his/her new bosses to be people whose mission is to get them canned).

Hedge Fund Interview Course
6/27/17

Interesting! Can you (or someone else) explain how a 5% shareholder has the power to request and receive (a) board seat(s)?

6/27/17

Because if they present a convincing case that a company is mismanaged, they can get support from other shareholders in a proxy fight and get their directors elected. Doesn't really matter how much of the stock they own, whether they are successful or not depends on how compelling is the thesis / analysis on how the company is mismanaged, needs new management, etc. Most shareholders are not activists, but they will gladly support one if it means producing higher returns.

Best Response
6/28/17

In addition to @mtnmmnn 's answer, investors of any kind are required to file a Schedule 13D within 10 days of acquiring 5% or more of a company. Often, activist funds will use their 13D filing as an opportunity to present to shareholders, the investing community, and the public the activist's qualms with the company. Someone below mentioned Dan Loeb and Third Point. Dan Loeb has chilled out recently, but he used to file scathing (and sometimes hilarious and laced with rap lyrics) letters with his 13D. These letters point out everything that @mtnmmnn said.

Put another way, the 5% threshold allows an activist to announce to the rest of the world that they think something's wrong with the company. Back in the day, activists (f.k.a. corporate raiders) were more asshole-ish about this. They'd use the 13D filing to announce to the public that the company was "in play," and hypothetically a takeover target a la Milken. Even though that might not happen as much nowadays, when you cross the 5% threshold you have the potential to hold significant influence over the company and its management. This brings a whole slew of legal crap that comes with it. For example, if you own 10% of a company, you have a substantial amount of influence over its management, so directors you nominate aren't considered "independent." Additionally, after a certain point, you can't sell a large chunk of your stock without first filing with the SEC. There are lots of other things that occur. See this link, which I just found, which outlines everything. https://media2.mofo.com/documents/checkpoints-memo...
Additionally, it helps to know that in many publicly traded companies, a 5% stake is a LOT. Think about it. If the company has no other large shareholders, that 5% becomes a material amount. Hypothetically (according to the link above), you could have a fiduciary duty to the rest of the shareholders at a threshold that's well under the 50% we usually attribute to a "controlling stake" (see p. 6 of the above link). For example, take Spartan Motors (Nasdaq: SPAR). Their largest shareholder is Dimensional Fund Advisors, with an 8.23% stake. If someone comes in and buys up 5% of the company (not from Dimensional Fund Advisors), that would place them as the fifth largest shareholder. If they double that stake, they legally control the company.

Make sense?

Look, that's not an "explosion"
It's just a rapid unscheduled disassembly

6/26/17

Activist hedge funds are very persuasive to other shareholders. Though they may only hold 5%, the support they gain from other shareholders can help them win proxy battles. The CEO and board doesn't want to get ousted and waste more time on proxy battles - plus they suffer reputation if they lose a proxy battle or simply if the activists bring to light how terribly management and board is doing. So they listen.

6/26/17

Third Point LLC might be able to illustrate this point. Here is a WSO post:
https://www.wallstreetoasis.com/forums/daniel-loeb...
And here is an article on DealBook: https://www.nytimes.com/2017/06/25/business/dealbo...

6/26/17

Because the activists are coming after the management team and potentially the CEO's job. If you're an ousted CEO it's much tougher to find a good paying gig after your reputation takes a hit.

26 Broadway
where's your sense of humor?

6/26/17

Ask Klaus Kleinfeld.

6/26/17

Hahahaha

6/28/17

And his trusty soccer ball.

Look, that's not an "explosion"
It's just a rapid unscheduled disassembly

6/27/17
DatesExcelModels:

Hi monkeys,

Can one of you explain why activist hedge funds are supposedly so feared by F500 companies? Why does a F500 CEO care so much about what a 5% shareholder wants that it requires him/her to devote a majority of their time responding to their arguments? I've read several articles in the Economist and WSJ as well as spoken to a few bankers but no-one has been able to provide me with a persuasive argument. I'm sure that WSO can provide this insight.

It's all about power for example when Martha Stewart was the most popular they accused her of insider trading.

6/27/17

BECAUSE THEY CAN FUCKING TAKE THEM DOWN

6/28/17

All time favorite has to be, Starboard Value and Darden. Google it, I think Investopedia did an article on them.

6/28/17

To answer your question re: why activists are so feared: It's because these are individuals who have built very lucrative careers out of targeting the weaknesses in a company's management and exposing them to the public.

When you're dealing with a guy like Loeb who has had a lot of success imposing his will on management, the issue is that he knows where to sniff for shit in the management of a company, and how to effectively call it out. Furthermore, activists rarely circle a company whose management is doing well. And so, there is a selection bias - if there's an activist on your ass, it's because you're perceived by the market to be doing a worse job than is necessary given the fixed factors in the macro economy, etc - in other words, you're not making the most of the opportunities available to you.

These investors, with a good enough thesis and a compelling enough proposition, can become lightning rods around which other shareholders that would otherwise stay quiet instead coalesce. In other words, there is a snowball effect, and the optics of being criticized by a successful critic are bad. People look at their shrinking stockholder's equity and think "Maybe it's time for an experienced investor to turn this around".

In terms of how these things are accomplished - in the US, publicly traded companies are corporations, the activities of which which are governed by a written legal document unique to each corporation called the bylaws. Among other things, the bylaws specify the timing and methods of board appointments. Many of them leave open the possibility of a large enough shareholder with appropriate bona fides putting forth board candidates for a floor/ballot vote - in other words, if you're big enough, you can force the company to allow your board candidates to be put forth to all shareholders of the company for a vote.

7/22/17

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