Let’s do it my way
Big companies are being stalked by hedge funds with new ideas
May 25th 2013 |The Economist - From the print edition
EVEN those in charge of listed corporations have bosses, however much they dislike thinking of their shareholders that way. So most chief executives hope to avoid the attention of “activist” investors—mostly hedge funds that specialise in shaking up listed companies in the hope of a share-price jolt. Sadly for those who dwell in corner offices, activists are getting brasher. Not only do they have growing cash piles to deploy, they are now comfortable taking on even the biggest companies.
Today’s activists are the descendants of the corporate raiders and asset-strippers who helped enliven the 1980s. Like their forebears, they target companies with sleepy managers, too much idle cash or ill-fitting divisions that might be lucratively spun off. The stakes they take in their targets tend to be small: typically 5% and in larger companies often much less. But funds often enlist the support of other shareholders to badger management for reforms. If that fails, a messy fight can ensue. Nasty words are traded in leaked letters or, better still, on cable television.
Sony is the latest famous name on the hit list. On May 14th Daniel Loeb, the boss of Third Point Management, disclosed that he owned 6.5% of the Japanese conglomerate, a stake worth $1.1 billion, and suggested it break itself up. This would lift the share price by 60%, he hopes, though the company is sceptical. Last month Apple, a computer-maker that is the world’s most valuable listed company, was prodded into promising $100 billion in payouts to shareholders in the next three years. This appeased David Einhorn, who heads Greenlight Capital, even though it fell short of his even bolder original suggestion. Other companies being hounded to varying degrees include UBS, PepsiCo, Netflix, Dell and Microsoft.
Some activists approach their targets with bright ideas based on extensive research. More often, and more prosaically, they pester firms for a quick return of cash to shareholders. Breaking up unwieldy corporations is coming back into fashion. Low interest rates and perky stockmarkets mean that assets being divested can fetch top dollar. Ousting a boss seen as a drag on the company also sometimes works, but not always: Yahoo, an internet company, has recovered somewhat since its chief executive was replaced last year in a campaign orchestrated by Mr Loeb, whereas J.C. Penney, a retailer, is languishing even though an activist brought in a new boss (who has since been sacked). Energy companies with easy-to-flog divisions have been popular targets lately, as have cash-rich tech groups and ailing financial firms.
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