Who knew? At least one participant in a recent survey says he found out a hedge fund had accumulated a position in his company via a news report. Developing a game plan for working with activist hedge-fund managers has been the study of The Conference Board.
Some $1.8 trillion in assets are held by approximately 9,000 hedge funds—an investor group noted for being impassive—and their efforts to boost shareholder value are increasingly successful. Of activist events studied by The Conference Board, hedge funds’ goals were achieved 40.6% of the time and partially achieved in 25.8% of instances, making for two-out-of-three odds that a hedge fund involved in the board room will result in some type of change.
Popular changes sought in hostile events include matters involving cash on hand, leverage and dividends (these were fully or partially successful in 70% of 65 hostile events); influencing M&A (77% of 22 hostile events); rescinding takeover defenses (72% of 43); ousting the chief executive or chairman (69% of 59); and reduced executive compensation (68% of 38).
Also worthy of note: The hostile hedge-fund calls for management to pursue a growth strategy were successful 0% of the time; none asked for growth.
The oil and gas industry has had considerable experience recently with activist hedge-fund managers.
• Jana Partners LLC (Barry Rosenstein) and Icahn Partners LP (Carl Icahn) were behind the break-up, and then sale, of Kerr-McGee Corp. (to Anadarko Petroleum Corp.).
• Icahn was behind the turn-around of National Energy Group and sale (to SandRidge Energy Inc.).
• Jana was involved in the sale of The Houston Exploration Co. (to Forest Oil Corp.).
• Third Point LLC (Daniel Loeb) was behind the sales of Pogo Producing Co. (to Plains Exploration & Production Co.) and Western Gas Resources Inc. (to Anadarko). It is now requesting membership on the TXCO Resources Inc. board.
• Nanes Delorme Partners I LP (Julien Balkany) is urging Vaalco Energy Inc. to seek strategic alternatives, including a possible sale.
• New Mountain Vantage GP LLC (David DiDomenico) has won representation on the board of National Fuel Gas Co., which owns producer Seneca Resources Corp.
• Steel Partners II LP (Warren Lichtenstein) is seeking membership on the Rowan Cos. Inc. board and wants to break up Rowan’s drilling and manufacturing units.
• Sandell Asset Management Corp. (Thomas Sandell) has convinced Southern Union Co. to MLP some of its gas-gathering and -processing assets.
The Conference Board’s study group was organized following a summit in London at which delegates concluded that “the motivations for the activism of hedge funds and other alternative investment vehicles should be investigated to ensure that their impact on certain market trends—i.e., short-termism versus long-termism—is fully understood.”
The study group makes the following recommendations to company directors.
Remain informed on institutional holdings and securities trading activities. “Securities-holding intelligence gathered from public filings and surveillance reports should be supplemented and corroborated with non-public information the company can access through ongoing discussions with investors.”
Understand hedge-fund investment strategies and activist tactics. “Management should consider establishing internal educational programs to engage board members and key employees, so they can also remain alert about activists’ intentions.”
Be aware of strategic, financial and governance vulnerabilities, and remain open-minded about change. “To have a full understanding of investors’ intentions, management should consider meeting with representatives of activist hedge funds.”
Participate in the formulation of response strategies and ensure their proper implementation. “Defense plans should not rely on entrenchment tools…(And) even if the activism campaign has become public, management should avoid outright criticism of investors and confrontation….”
Engage in an open dialogue with investors and gatekeepers. “Companies should monitor their governance and credit ratings, and develop a plan to correct any shortcoming….”
Promote transparency and integrity of the voting process. “Publication of the meeting agenda should occur in advance of the record date….”
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