BusinessWeek – Activist hedge funds had a banner day on Feb. 7. Before the stock market opened, General Motors Corp. (GM ) finally succumbed to months of pressure from billionaire Kirk Kerkorian and his Tracinda Corp. investment fund by slashing its dividend, cutting executive pay, and naming a Kerkorian adviser to the board. In the afternoon, an adviser to billionaire hedge fund manager Carl Icahn issued a 343-page paper detailing how to break up Time Warner Inc. (TWX ) and release about $40 billion in shareholder value.
Boosting share prices rather than taking over underperforming companies is the name of the game, and any strategy to achieve that seems fair play. The new activists often band together and swarm all over the management. They seek new allies such as Wall Street’s investment banks. Icahn, for example, signed up Lazard LLC to bolster his fight against Time Warner. And they garner support from shareholders by using savvy media campaigns and the Internet. Take William A. Ackman, founder of New York hedge fund adviser Pershing Square Capital Management LP, who was trying to force McDonald’s Corp. (MCD ) to restructure. On Jan. 18 he broadcast a standing-room-only PowerPoint presentation of his proposals at the Millennium Broadway Hotel in Times Square via Internet video and offered a free call-in number. Some 800 shareholders, analysts, and reporters attended or tuned in. “These were exactly the kind of people whose attention you wanted to get,” says Ackman, who holds just a 4.5% stake.
Once they’ve got their teeth into a company, the new activists usually won’t let go. “I stand up for all I’m entitled to and will accept nothing less,” says Phillip Goldstein, founder of Bulldog Investors LLC, which fought a long battle to force Blair Corp. (BL ), a Warren (Pa.)-based catalog retailer, to sell its $174 million portfolio of receivables. Such tenacity makes them formidable infighters. “Companies that still have a pre-Enron mentality are going to get swamped by this new activism,” warns Ralph V. Whitworth of Relational Investors LLC, which has been instrumental in forcing restructurings at Waste Management (WMI ) and Mattel (MAT ).
The new activists are more dangerous to management than their predecessors. For starters, unlike mutual and pension fund managers, which often are trying to sell money management services to companies, the hedge funds are not tempted to pull their punches. In addition, they’re so well bankrolled that they don’t have to borrow money from others as the 1980s raiders did, and they can afford long-drawn-out fights with management. “With more than $1 trillion in assets controlled by hedge funds, they have credibility and capital,” says Stefan Selig, global head of mergers and acquisitions at Banc of America Securities (BAC ). “Companies have to take this threat seriously; the balance of power is shifting away from boards. You can’t ignore them just because it’s some hedge fund you never heard of.”
The new tactics can produce faster results than traditional methods of pressuring managements through shareholder resolutions on the agenda at company annual meetings. For example, about a week after Ackman’s audio-visual pummeling of McDonald’s, the company unveiled a plan to sell 1,500 company-owned restaurants, buy back $1 billion of stock in the first quarter, and provide more financial disclosure — all similar to the moves Ackman had called for. Last April, Blair announced it would sell its receivables portfolio — as Bulldog wished — at a 6% premium. Even before the transaction was done, Blair took out a loan to buy back the stakes of Bulldog and other investors at 42 a share.
