How to play it: Activist investors finding more targets

Date: Thursday, September 22, 2011
Author: Katya Wachtel, Reuters

THE ISSUE: Hedge fund manager Daniel Loeb is rattling the cages at Yahoo Inc. Inc., calling for big changes at the struggling online media giant to lift its stock price. The number of companies being targeted has risen sharply.

(Reuters) - Daniel Loeb, one of the $2 trillion hedge fund industry's most successful managers, is going back to his investing roots in pushing for more action at Yahoo after the recent ouster of CEO Carol Bartz.

Yahoo stock is up 7 percent since Loeb's Third Point revealed its push for change at the Internet portal.

A rising number of companies are becoming targets of investors demanding share-boosting actions.

To date, activists have made formal requests for structural or management changes at 241 U.S. companies, compared to 231 companies for all of 2010, according to Hedge Fund Solutions, a company that tracks activist activity.

THE SHORT TERM VIEW

Many companies' stocks go up when activists proclaim their interest -- at least in the short term. But that means the money is often made early in the game. How you know which companies they will target?

Damien Park, managing partner of Hedge Fund Solutions, says that in the current environment activists are busy looking at companies that removed anti-takeover provisions and are holding big piles of uncommitted cash. Sluggish stock prices are also inspiring the interest of outside investors.

In recent examples, Activist Jana Partners recently took aim at McGraw-Hill Cos to unlock value by splitting its textbook business from its capital markets group. Jaguar Financial Corp targeted Research in Motion when its price plunged. Both stocks gained value when the activists arrived on the scene.

THE LONGER PAYOFF

The shares of McGraw-Hill have kept rising, now up 26 percent since Jana and Ontario Teachers Pension Plan called for a four-way breakup of the company on August 22.

That's a more ambitious plan than the two-way breakup McGraw-Hill announced on September 12.

In the case of Yahoo, the stock's 7 percent rise began with a regulatory filing by Loeb's Third Point fund September 8. The investor called for even greater management changes at the company. Third Point owns about 5 percent of Yahoo's shares.

The share price was further bolstered when buyout firms began to start sniffing around Yahoo. Silver Lake, a private equity firm that sold its stake in Skype for $8.5 billion to Microsoft this year, recently approached the Yahoo board about a potential acquisition, according to media reports.

In both cases, the activists who arrived first were able to attract important followers with enough clout to make real changes.

THE CAUTIONARY TALES

But betting on activists is not for the faint-hearted.

Shares of Research in Motion are down 23 percent since Jaguar came knocking on its door earlier this month. And the troubles for the Blackberry maker continue to mount.

Investors who bet on now-bankrupt Borders and Target after Bill Ackman's Pershing Square Capital Management initiated activist campaigns in 2006 and 2008 respectively, found themselves in a quagmire.

In fact, Ackman has called his activist campaign against Target one of the biggest mistakes he's ever made as a hedge fund manager.

In August, Forest Labs beat back a challenge from the dean of activist investors, Carl Icahn, who pushed for board seats. Since then its stock has retreated from just over $40 to $33, a drop of 17.5 percent.

Research is hard to find on the overall track record of activists. Gabelli Enterprise Mergers and Acquisition Fund.that follows rumored deals have basically followed the trend of the overall market.

For copycats who want to cash in quickly the rewards may be elusive. Hedge funds run by activist investors sometimes work over long time frames to unlock value.

"Crucially, you will need patience," said Gemma Godfrey, chairman of the investment committee at Credo Capital Plc. . "Turning round a company, especially due to their nuances and complexities, can take years."