On the lookout for tag-along activists

May 28, 2009

Thomson Reuters studies how investors ride the coattails of others

At the height of activist fever in 2006, the Wall Street Journal wrote about remoray funds. Like the fish that follow sharks, these investors followed the moves of higher-profile hedge funds staging activist campaigns. A target company risked becoming a ‘hedge fund roach motel’: when the lead activist exited, the rest would pour out, and the stock would collapse. 

The fear factor is still great in 2009. In response to the concerns of IROs, Thomson Reuters is sending clients research showing how ‘tag alongs’ ride the coattails of lead activists.

Glenn Curtis, director of strategic research at Thomson Reuters, did the tag-along study as part of his work tracking shareholder activism from quarter to quarter. He looked at recent campaigns and the buying activity around the time they were launched. Among the target companies he studied were Biogen, Yahoo, Motorola, Target, Wendy’s and TD Ameritrade.

‘It could be a good thing when other funds get involved; they may all plan to go along for the ride for the long haul,’ Curtis says. ‘But it could be bad if they all sell at once, or if they’re trying to vote out the board.’

Curtis’ advice is to always communicate with activists – and their tag alongs. ‘If nothing else, it gives an IRO a feel for where the campaign is heading,’ he says. He adds that his quarterly activism reports show more and more cases of compromise: ‘Companies are communicating more than they used to.’

Another piece of advice for IROs is to identify their company’s vulnerabilities so they’re prepared when activists and their tag alongs appear. ‘There are a lot of anxious shareholders out there and many companies are easier targets than they used to be,’ Curtis says.

Because hedge funds have seen a lot of redemptions and lost a lot of value in the financial crisis, the support of tag alongs is becoming more important. ‘Cooperating with other funds and trying to vote the same way is going to be a big issue going forward,’ Curtis says.

Lead activists and possible tag alongs
Barington Capital – Benchmark, Clinton, DB Zwirn, Ramius
Carl Icahn –TIAA-Cref, Highfields Capital, JANA Partners, SAC, Sandell
The Children’s Investment Fund – 3G, Atticus
JANA Partners – SAC, Third Point
Pershing Square – Greenlight Capital, Third Point
Pirate Capital – Steel Partners
Sandell – JANA Partners
Third Point – David Knott, Jason Aryeh, JPMorgan Ventures
Trian – Pershing Square

By Neil Stewart