Hedge Funds On Track To Set New Record For Activist Campaigns

Feb.14, 2008 in Market Outlook

Last Update: 2/14/2008 12:47:35 PM

By Kaja Whitehouse
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Efforts by hedge funds and other activist investors to
fight for board seats, oppose mergers and otherwise shake up companies is on
track to beat last year’s record levels, contrary to expectations that activity
would dry up due to unstable market conditions.

There have been 72 campaigns waged by activists this year through Monday, with
targeted companies ranging from Countrywide Financial Corp. (CFC) to the New York
Times Co. (NYT). Last year, when shareholder activism hit record levels, there
were just 54 campaigns waged over the same time period, according to FactSet
SharkWatch, which tracks proxy contests and corporate takeover defenses.

Hedge funds continue to be big participants, including recent efforts by the
likes of Carl Icahn and Triarc Cos.’s (TRY) Nelson Peltz. More than half, or 38,
of the activist campaigns so far this year were initiated by hedge funds,
compared with 21 during the same period last year and 17 the year prior,
according to FactSet SharkWatch.

Activist investors, commonly hedge funds, seek to boost stock prices by forcing
changes such as the sale of business units or stock buybacks, often by winning
seats on boards. With the uncertain economic outlook and roller-coaster stock
prices there’s been speculation that their heyday may have come to an end.

“People were speculating the credit crunch would take some of the wind out of the
sails of the activists, but it hasn’t,” said Christopher Young, head of M&Aresearch in the governance unit of Riskmetrics Group Inc. (RMG). “Weak markets
provide opportunities for activism. If the market goes sideways or down, activism
might be seen as one of the few ways to go in and provide a return,” he said.

To be sure, there may be changes in the strategies they use and the companies
they target. Small-cap companies could be a bigger focus this year and activity
may be more concentrated on evergreen strategies such as obtaining seats on
boards or getting companies to rethink their strategic plans. The credit crunch,
meanwhile, will probably put a damper on efforts to boost stock prices by forcing
sales.

That said, regional airline operator ExpressJet Holdings Inc. (XJT), management
and home security company Brink’s Co. (BCO) and industrial products manufacturer
EnPro Industries (NPO) are among those being asked to boost stock prices via an
asset sale. Ralph Whitworth, the hedge fund manager who was recently appointed to
the board of Sprint Nextel Corp. (S), is considering the benefits of a spinoff or
sale of the Nextel network, according to The Wall Street Journal, citing an
unnamed source.

Some shareholders are questioning deals on valuation grounds: one hedge fund, SRM
Global, is objecting to Bank of America Corp.’s (BAC) $4.6 billion cash-and-stock
offer for beleaguered mortgage company Countrywide; S.A.C. Capital, meanwhile, is
saying Celgene Corp.’s (CELG) plan to acquire hospice care company Pharmion Corp.
(PHRM) for $72 a share won’t “fairly compensate” shareholders.

There is also some indication that traditionally passive mutual fund firms may
continue to speak out against deals they think are undervalued or unsuitable, as
asset managers T. Rowe Price Group Inc. (TROW) and Pzena Investment Management
Inc. (PZN) did last year. This week, mutual fund firm Legg Mason Inc. (LM)
disclosed it’s been building its stake in Countrywide, up to 14.9%, amid concerns
about the planned acquisition.

Watchers of proxy fights are also keeping an eye on the beaten-down financial
services and homebuilding sectors given their depressed stock levels and troubles
managing losses tied to subprime mortgages. Glenn Curtis, who tracks shareholder
activism for Thomson Corp. (TOC), thinks hedge fund activity in these sectors
might pick up later this year once things settle down for these groups.

“Hedge funds like to pick up assets on the cheap, but at the same time I don’t
think they want to catch a falling knife,” he said. Investors may look to force
homebuilders sitting on considerable real estate to sell their land, as they’ve
done with restaurants and retailers in the past, he said.

There may also be increased efforts to unseat existing directors of companies
stung by subprime. While these campaigns are typically waged by investors that
push for governance rather than operational changes, such as union pension funds,
they could make these companies more vulnerable to hedge funds.

Discussions are already underway regarding voting against or withholding votes
from board members at Merrill Lynch & Co. (MER), Morgan Stanley (MS), Bank of
America and Washington Mutual Inc. (WM). Support from shareholders who lost money
when these stocks dropped could gain steam.

“We’re all here because this is a serious situation and we’ve lost so much value.
I don’t know if we may have to use stronger measures such as withholding votes
from the board,” said Hye-Won Choi, Head of Corporate Governance at TIAA-CREF,
which manages $435 billion in assets, mostly for educational institutions. “We
think withholding votes from boards is a very aggressive action and we use it
very sparingly. This is one of the cases where we would consider withholding,”
she said, regarding some of the financial services companies.

By Kaja Whitehouse, Dow Jones Newswires; 201-938-2243;
kaja.whitehouse@dowjones.com

(END) Dow Jones Newswires

February 14, 2008 12:47 ET (17:47 GMT)

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