Hedge fund activism: Cases, analysis and corporate governance
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- Muhtaseb, M. & Grover, K. Int J Discl Gov (2012) 9: 264. doi:10.1057/jdg.2012.3
Activist hedge funds attempt to enhance shareholder value for their fund investors and company shareholders mainly through their active intervention in the business strategy of target firms. The objective of this article is to investigate five cases of hedge fund activism. The five activist hedge fund cases are Pirate Capital, LLC versus Walter Industries, Inc.; Shamrock Activist Value Fund versus Intrado, Inc.; MLF Investments, LLC versus Alloy, Inc.; Steel Partners II, L.P. versus Rowan Companies, Inc.; and JANA Partners, LLC versus The Houston Exploration Company. The events of the cases took place between 2003 and 2009. This article offers a unique exposition of the details of value-creating strategies pursued by activist hedge fund managers. In all the five cases examined, the target company's stock was undervalued from the hedge fund manager's perspective. Over the period, starting 10 days before the announcement of filing of Schedule 13D and ending 10 days after the filing, stock prices of target firms experienced significant increases. The initial response to the fund proposals from company management of the target company is always reluctant and unsatisfactory. Eventually all companies react favorably to hedge fund managers’ proposals. The management of the target company cannot ignore the proposals coming from informed activist shareholders. The key lesson is for company management of a target company to manage the assets of the firm efficiently; otherwise it will face the risk of a challenge to its corporate governance in the form of an attack by activist investors.