Wednesday, April 8, 2009

Activist Investors Sidelined by Brutal Market

Eric Jackson, a regular contributor to this blog, recently wrote an article for titled, Activist Investors Sidelined by Brutal Market. We found this to be an excellent article on the current and future state of activist investing and recommend the read. Click here to read the article or visit Eric's Breakout Performance blog. In the article Eric highlights a few important components for the next generation of activists to master in order to successfully take over.

This has been abbreviated from Eric's article but generally includes the following:

  • Hedge, in order to preserve partner capital in the event of terrible years like 2008. The days of long-only are over.
  • Build a reputation for always doing right for shareholders (especially long-term holders). Some of the "quick fix" activists of the last five years never won the trust of large mutual funds and pension funds, who tend to be the biggest holders of stock of the large-cap companies. As a result, proxy contests failed to win over the support of this important constituency, for fear of how these activists would represent their interests properly.
  • Focus more on strategy and operations, less on single events. There will always be a place for activist investors to go after a company, advocating they sell a single division, or do a quick dividend to shareholders. However, these situations tend to be more prevalent in small-cap companies. Large-cap companies, by definition, have more complex problems and require more complex solutions. The next generation of top activists will understand this and have deep expertise in their firms on strategy and operations.
  • Use the tools of the Internet and social networking . Social networking tools (i.e. blogs, YouTube, wikis, Facebook and Twitter) allow fellow shareholders to pledge support and encourage them to suggest additional ideas on how companies could improve. The next generation of large activist investors will be masters at using the Internet to conduct their campaigns.
  • Be more collaborative, less combative with target companies. It will always be necessary to run successful -- sometimes nasty -- proxy contests against entrenched boards and management. There's a time to knock heads. However, some activists only knock heads. They only know how to hit one key on the piano. The next generation of activist investors will be able to play hard ball but tend to be much more collaborative with the board and the CEO -- at least at the beginning, until reasonable dialog leads nowhere. Such an approach is also far less expensive than an "all-negative, all-the-time" approach.
Posted by Damien Park, President Hedge Fund Solutions