Hedge funds, who are notorious for chasing large returns often in the short term, are no strangers of pushing for strategic change within companies that they invest in. However, recent trends have seen more and more hedge fund managers looking to oust board members who they feel are not in line with their objectives for growth.
On the surface, it seems odd that an investor can use their position to shake up management. However, some hedge funds or high net worth investors have substantial stakes in a company, sometimes 10% or more. When these kinds of numbers come into play, hedge funds feel they have a right as to what goes on behind the scenes. Board members and company management tend to disagree. And thus, the proxy battle begins. Some recent examples will help to shed light on this often uncomfortable process.
Let’s take the most recent case involving Yahoo. Yahoo, perhaps the most notable online destination in the world, was feeling the heat from…Carl Icahn. Who the heck is Carl Icahn? A self-made billionaire and former Wall Streete
r who built up a significant stake in Yahoo and felt that gave him the right to intervene on corporate matters. Corporate matters, in this case, being the potential merger with Microsoft, which Icahn felt would position Yahoo better against its biggest competitor, Google. After Yahoo CEO Jerry Yang and the board turned down a $44.6 billion bid from Microsoft saying that it “substantially undervalues” the company, Icahn waged a battle.
His goal was to replace Yang and other members of Yahoo’s board who he felt had a personal vengeance against Microsoft and weren’t looking out for the shareholders. Icahn rallied his troops and gained the support of a few prominent hedge funds, including Paulson & Co., the hedge fund ran by John Paulson who was notorious for making $3 billion from the subprime fallout.
Despite Icahn’s influence and his posse, a Microsoft buyout never came to fruition. However, Icahn kept his nickname as the “corporate raider,” which he got back in 1985 after a hostile takeover of TWA and not much to show for it after.
Another similar case involved women’s plus size clothing manufacturer Charming Shoppes Inc. Two hedge funds, Crescendo Partners and Myca Partners, built up a 7.9% stake in the company, or about 9 million shares. When stocks reached an all-time low and performance was lagging, the hedge funds felt it was time to take charge and proceeded to nominate three hedge funders to the Board.
What followed was a nasty proxy battle in which shareholders were bombarded with emails, where Charming Shoppes would accuse the hedge funds of acting on their own greed, and where the hedge funds would accuse the company of having a flawed business structure. After months of nasty words, the two finally reached an agreement, where the hedge funds would receive two seats on the Board.
So why then, instead of cashing out and focusing on other investments, do hedge funds wish to linger and cause a stir? Taken from a recent statement to shareholders, hedge funds TCI and 3G Capital Partners may have the answer:
“Michael Ward, the Chairman and CEO of CSX, wondered why we haven’t just taken our profits and sold our shares, much as the board and management of CSX have done over the past two years. If we believed that CSX already had achieved its full operating potential, that’s exactly what we would do. However, in our view, CSX has only just begun to improve…”
TCI and 3G are also involved in a fierce proxy battle with railroad operator CSX, claiming that the current Board has little or no railroad experience. They are seeking their own slate of nominees for the Board, having acquired an almost 9% share of the company.
Hedge Funds are not well known for sitting passively while patiently awaiting returns. However, if recent cases have set the precedent, more and more powerful hedge funds and aggressive investors will be pushing for changes in management via Board rearrangement. It is up to the shareholder to take an active role in deciphering who is looking out for the company, and who is seeking personal gain.
Tags: 3G, board of directors, Carl Icahn, CEO, Charming Shoppes, CSX, Jerry Yang, Microsoft, TCI, Yahoo
