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Activist Hedge Fund Managers Eye CEOs Sitting on Piles of Cash

They’re back. Activist hedge fund managers, who agitate to force out entrenched company managements, are in fighting form for the 2011 proxy season and stalking companies hoarding cash.

They’re back. Activist hedge fund managers, who agitate to force out entrenched company managements, are in fighting form for the 2011 proxy season and stalking companies hoarding cash.

“You’re seeing more attention paid to activism, given corporate balance sheets’ cash reserves,” says Jason Orchard, a principal with New York–based fund-of-hedge-funds firm Spring Mountain Capital, which invests with activist and event-driven funds. “Companies are still a little leery on this recovery, but they have so much cash.”

Finance 101 suggests that this capital should be put to work. ”Hedge fund managers, and the activists especially, look at those balance sheets and think they can optimize them,” he says.

Perhaps the best-known activist-inclined U.S. hedge fund firm, William Ackman’s $8.7 billion Pershing Square Capital Management, has a problematic but potentially rewarding activist position — a 37.3 percent stake — in ailing bookseller Borders Group. In December, Ackman told Borders management that he’d be willing to finance a cash bid by the chain for rival Barnes & Noble. Borders took him up on the offer; Barnes & Noble hasn’t commented. Meanwhile, Ackman recently got himself named to the board of J.C Penney, another of his targets.

Activists aren’t bound by borders — or categories. New York–based turnaround specialist
and private equity manager Sherborne Investors aims to replace the chairman of London-based F&C Asset Management with Sherborne’s founder, Edward Bramson. A special general meeting was scheduled for February 3.

A further sign that activism is on the rise is start-ups. Keith Meister, the longtime right-hand man to grizzled corporate raider Carl Icahn, is launching his own activist fund. And Harbinger Capital Partners’ senior analyst Lawrence Clark has left that hedge fund firm to start an event-driven fund.

Meanwhile, a onetime activist, Daniel Loeb, founder of hedge fund Third Point, has toned down his antimanagement rhetoric in recent years, resulting in his “activist” fund receiving the less-provocative label “event-driven.” A buttoned-up Loeb — who became infamous for his “poison pen letters” to CEOs — plus Third Point’s strong recent results may just appeal to conservative blue-chip institutional investors wary of the activist label.

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