Hedge funds are increasingly in a fighting mood. Although
overall activism is roughly at the same level as last year, the
number of proxy fights initiated by hedge funds is on the
Through late July hedge funds were involved in 42 proxy
fights, compared with 46 in all of last year, according to data
on corporate activism from financial data company FactSet.
Whats more, this year about 43 percent of hedge-fund-led
proxy fights went the distance compared to about 30.4 percent
Earlier this year, for example, Bill Ackmans Pershing
Square Capital Management won its proxy fight with Canadian
Pacific Railway when all seven of its nominees got onto the
board of directors. Ackman has also drawn attention to his
stakes in J.C. Penney Co. and Procter & Gamble.
Dan Loebs Third Point agreed to end his threatened
proxy battle against Yahoo earlier this year when the Internet
company agreed to add three of Third Points proposed
nominees to the board, including Loeb himself.
Earlier this year John Paulson pushed for changes at The
Hartford Financial Services Group in what proved to be his
first activist position.
However, while it seems like the hedge fund luminaries are
taking on more and more megacap stocks, much of the action is
taking place among the microcaps.
According to Chris Cernich, head of M&A and
proxy-contest research at proxy-advisory firm Institutional
Shareholder Services (ISS), in the past few years there has
been a surge in the number of proxy fights between small,
lesser-known hedge funds and small target companies.
For example, he says in the 19 proxy fights he counts as
having gone the distance in the first half of the year
18 of which Cernich says involved hedge funds the median
market cap of the target companies was only $24 million.
Thirteen of the 19 contests involved companies with market
caps of $42 million or below while five of the 19 had market
caps of less than $15 million, according to ISS. Five of the
targets were small banks.
You rarely see that, says Cernich, since it is
hard for the investor sponsoring the fight to make their money
For example, Los Angelesbased Red Mountain Capital
Partners a small hedge fund firm that specializes in
small-cap companies took control of the board at the $27
million Texas-based oil and gas exploration company, Cross
Border Resources. New Yorkbased activist investor Clinton
Group won the board seat it was seeking at the $18 million
Rumson Fair Haven Bank and Trust in New Jersey.
However, in 9 of the 19 contests, the dissident lost. This
included Starboard Value in its high-profile battle with AOL,
as well as Brigade Leveraged Capital, which failed to get one
board seat at casino operator Greektown Superholdings.
One group that seems to be concerned about the rising level
of hedge fund proxy fights is the takeover defense bar.
In July Martin Lipton of Wachtell, Lipton, Rosen & Katz,
who is credited with inventing the poison pill defense in the
1980s, fired off a four-page memo entitled, Dealing With
Activist Hedge Funds, which he says is a revision of the
one he did in 2007 as a supplement to his Takeover
Response Checklist. The past ten years have seen a
high and increasing level of activist campaigns, he
writes, adding during that period there have been more than 300
activist attacks on major companies.
He warned clients that some of the activists aim to change
management or the board of the target in order to make it
easier to take over the company or force a sale of the target.
Careful planning and a proactive response are
critical, he writes. Failure to prepare reduces a
companys ability to control its own destiny.
Lipton further counsels: Companies must regularly
adjust strategies and defenses to meet changing market
conditions and legal developments.
This clearly includes even the smallest public