Activist hedge funds increasingly press corporate brass
Call it a rite of spring. No, not Opening Day at Fenway Park. I’m talking about proxy season and the growing crowd of activist hedge fund managers who use shareholder votes to pressure the executives of public companies to make big changes.
But the kind of hedge fund activism that once focused on the spring shareholder meeting has become a year-round phenomenon. There seem to be more of them — making more demands than ever before.
Last year, there were 344 public companies targeted by hedge funds and other activist investors, according to a survey by the research firm Activist Insight and a law firm that has worked for such investors. That was 18 percent more than in the previous year, and the authors of the survey forecast even more activity this year.
There has been plenty of action in our backyard. Starboard Value pushed hard for Staples Inc., of Framingham, to acquire Office Depot, which had recently merged with OfficeMax Inc. Staples executives did just that two months ago, though they claimed to have quietly tried to reach a deal on their own for some time.
And at Ariad Pharmaceuticals Inc., hedge fund manager Alex Denner, who controls one seat on the board and owns about 7 percent of the Cambridge company, wants to push chief executive Harvey Berger out of the business he founded two decades ago.
Hedge fund activism is the kind of polarizing movement that people tend to loathe or like. The popular opinion: Today’s activist hedge fund managers are just a new generation of barbarians at the gate. A minority view approving of their work, voiced most recently by the Economist magazine, thinks American capitalism is better off for it.
Activist hedge fund managers really are intensely self-interested people in the business of making money. Many push plans that could be detrimental to anyone or anything with a long-term point of view. But others do work that benefits everyone by nudging — or shoving — entrenched managers.
The short-term mentality of hedge funds is what drives most critics crazy.
Those managers aren’t going to be around forever and want results now.
Often, that means pushing companies to spend cash buying back their own stock (which, at least theoretically, should boost share prices) and cut expenses. They say expenses but they usually mean people.
One familiar alternative demand: Sell stuff. That might mean divisions of a business or the company itself. Again, the objective is to get results now.
But all hedge fund managers are not easily stereotyped as reckless, rapacious profiteers. As examples, take the two I mentioned earlier.
Executives at Staples had good reason to be wary of Starboard Value chief Jeffrey Smith when he showed up at the door. Smith has a habit of buying shares of companies, demanding executives make changes, and suggesting those who resist might not be around long.
Smith already owned a large chunk of Office Depot and clearly saw a future in which all the leading office superstore companies were melded into one business, to compete against online giants and the biggest of big-box retailers. Soon after Staples announced its merger agreement with Office Depot, Smith suggested that top management could still be at risk if they didn’t execute the plan well enough.
So, yes, Smith sounds like a jerk. But once you get past that, it’s hard to disagree with the plan. Many see a future like that, but Smith was pushing for it to happen sooner. In this case, immediacy is no sin. It’s an advantage.
In Cambridge, there may be fireworks at the Ariad annual meeting in a couple of months. Denner, who runs a firm called Sarissa Capital Management, once served as Carl Icahn’s point man on biotech stocks. The Globe’s Robert Weisman recently laid outDenner’s latest plans to get rid of Berger as the company’s chief executive.
Ariad has survived a lot of ups and downs over the past couple of years, and I don’t know what to make of the challenge to Berger. But I was around when Denner, working for Icahn, helped wage an equally contentious campaign to unseat the top management of Biogen Inc.
That fight wasn’t about stock buybacks and other short-term opportunities. It was about the direction of a big company and what critics saw as a lack of focus.
Eventually, the activists won and Biogen went on to great success. The company’s chief executive exited under pressure, and George Scangos took his place in 2010. Biogen’s shares have since soared 655 percent, and sales this year are expected to be twice what the company posted just four years.
Biogen has become the most valued, most important company in Massachusetts — by a wide margin.
Much of that success came out of labs and clinics. But clearly Biogen is better off thanks to management changes that weren’t going to happen on their own. Icahn sold his Biogen shares long ago, but the company, employees, and shareholders continue to benefit.
Activist hedge funds aren’t going away, and many will continue to push bad ideas. But companies aren’t defenseless to resist them. The best strategy: Adopt good ideas from hedge fund managers and just say no to the rest.