Ever since the release of Oliver Stone’s 1987 feature ‘Wall Street’, the marauding figure of the corporate raider has fascinated and alarmed both audiences and big business in equal measure.
Today, a different breed of animal stalks the plains (minus garish braces, immaculately coiffured hair[i] and Michael Douglas). According to Hedge Fund Research, activist hedge funds grew their assets 269% to almost $120 billion between 2009-2014, largely off the back of increased investment from major institutional players. Such funds typically hold a long-biased portfolio composed of minority stakes in target companies; ultimately seeking to ‘unlock’ shareholder value through operational improvements or the rather more Gordon Gekko-esque practices of company restructurings and asset stripping, among other approaches. In time, usually over a considerable horizon, these changes should be reflected in the target company stock price. “We buy 8, 9, 10 percent of a company when we see long-term value in the investment, when the pieces are worth significantly more than the entire business” said one such activist manager, Pershing Square’s Bill Ackman, in a recent interview[ii], “We’re in no rush to get out”.
Stateside, historically the hub of such activism, column inches devoted to the likes of Bill Ackman and his contemporaries have led to practical celebrity status. Over time, activist managers have thus transitioned into astute corporate communicators, engaging with local and international outlets to advance their investment agenda and build credibility among key stakeholders. Through open letters to shareholders, primetime interviews, commissioned videos, statements via social media and similar tactics, the media has become a de facto battleground for public opinion.
One device that perhaps epitomises this battleground more than any other is the so-called letter to the executive, popularised by Third Point’s Dan Loeb – the hedge fund industry’s rabble-rouser in chief. Since his firm’s inception in 1995, Loeb’s open, vitriolic missives to the senior management of companies in which he is invested have made him the scourge of the underperforming boardroom, with The New Yorker likening his zealous behaviour to that of a “certain kind of basketball fan unhappy with an overpaid, underperforming point guard and recommend[ing], in hyperbolic language, that they be benched[iii]”. The result is a literary art form in itself, with an audience extending far beyond that of immediate stakeholders. Loeb is rigorous in his assessment of managerial incompetence, as demonstrated in his scathing review of Star Gas CEO Irik Sevin: “A review of your record reveals years of value destruction and strategic blunders, which have led us to dub you one of the most dangerous and incompetent executives in America[iv]”. Like a boxer biding his time until the final round to floor his opponent, Loeb saves the haymaker for his sign-off: “It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites[v]”. Three weeks after Star Gas received the letter, Sevin resigned. The pen can indeed be mightier than the sword, it seems.
Whilst communications of this nature perhaps don’t do a great deal to alleviate the reputational issues that still plague the hedge fund industry, they do provide a fascinating insight into both investing and management philosophy. Consequentially, corporate boards should have an integrated, pre-emptive response to the messaging that activist fund managers may trickle into the marketplace, remembering their duty to the company and all its shareholders – not just the loudest ones.
Matthew Thomas, Senior Account Executive, Corporate
[i] In some instances.
[ii] Ahuja, M. 2012. The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds.
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October 15, 2020