Activists As Sharks, Wolves, Jaguars?

Investors are increasingly taking greater measures and more aggressive tactics to have their goals met. According to a white paper by ICR, the credit crunch has fueled the current hostile activist environment and public companies need to better prepare for the increased activism.

After studying their styles, philosophies, and tactics, ICR, a communications consulting firm, divided various hedge funds and activists into three categories: Sharks, Wolves, and the Jaguars.

• Level One: “The Sharks” - Hedge funds or individuals primarily dedicated to activist investing. A number of funds in this category raised substantial capital in the last twelve months. They are the most frequent 13-D filers and are aggressive when seeking operational, financial, or structural change.

• Level Two: “The Wolves” - These too are frequent activists but typically follow others or act in step with other investors. They employ similar strategies as the “Sharks” but are not the first 13-D filer. They are more subtle than the sharks especially regarding communications directed at the target company or in a proxy contest.

• Level 3: “The Jaguars” - This group is aggressive but do not call themselves activists. Despite the lack of label, they still take overt and aggressive positions relative to the board based on their idea of what goals needs to be met.

Most activists perceive themselves as promoting corporate governance tactics that will best benefit investors’ bottom-line, according to the white paper. Activist funds tend to emphasize that boards’ decisions need to unlock shareholder value and that management is accountable to their shareholders.

Aside from activist funds taking on more aggressive “philosophies,” some of the largest public pension funds are also following suit. The California Public Employees’ Retirement System (CalPERS), for one, has taken the position that good corporate governance leads to improved long-term performance. With $253 billion in assets, they are one of the largest and most active institutional activist shareholders. They recently made a $600 million commitment to Breeden Capital, an activist fund run by Richard Breeden, a former chairman of the SEC.

An earlier study by ICR in 2006, classified the five major categories that hedge fund activism can be classified as:

• Maximize shareholder value

• Distribute excess cash, increase leverage, increase dividends, or stock repurchase 

• Refocus business strategy, including operational efficiency, cost cutting, excess diversification, and divest assets

• Sell the company

• Improve corporate governance 

Hedge funds tactics include communicating goals with the board, seeking a proxy contest, publicly challenge the board or file shareholder proposals, launch proxy contests to either replace the board or ensue a fight to gain more representation, or sue the company with the intention to take control of the company.

Hedge funds are also teaming up to make their cases heard. The multiple funds form a “wolf pack” and are able to voice their concerns with increasing power behind them. Companies are to be weary of these teams since hedge fund activists tend to focus on the short-term benefits, thus sometimes hurting long-term investors and by doing so, disrupt companies and create overall instability with the company’s boards.

Activists are becoming an increasingly potent force for boards. Among the major strategies that ICR suggests boards adopt is to know your shareholders and never underestimate their resources. These measures can prevent being blind-sided by activist investors. By hiring experience financial experts and advisors, instead of junior executives, corporate boards can strategize against potential proxy battles down the road.