December 17, 2007

Following Activist Shareholders into a Stock

The following is an article about the value added returns generated by Activist shareholders. I am always skeptical about following a well know investor into a stock, and you should too. The article says that returns were marginal and negligible at best.

One of my basic beliefs about investment is to have a rationale and a valuation to buying a stock, and if a big shot investor confirms my thesis, the better. However investing solely based on their action will lead to losses.

Take for example Peltz's investments in various food companies. I have no doubt that Mr Peltz generates excellent returns for his investors, but sometime his best interest or involvement in a business may not be in the shareholders best interest. Mr Peltz is a business man and a good one too. But his decision to buy a stock may be different that mine or yours, being long term holding for capital appreciation. Sometimes he may buy a stock to influence the company to sell a division that he might want to combine with another one of his holdings. For example, he proposes to take Wendy's private, after it spun off Tim Horton's. I am sure that the combination of Wendy's and Arby's will yield significant synergies and cost savings for Peltz.

My point is the motivation of activist shareholders are many and not necessary the same as yours. Therefore it is important to have your own rationale and investment thesis.

your value searching investor,

Business - "When Investor Activism Doesn't Pay By SCOTT THURM September 12, 2007; Page A2

"On April 29, 2005, mutual-fund manager Franklin Mutual Advisers LLC disclosed that it owned 7.1% of Weyerhaeuser Co. and sought to alter the "strategic direction, corporate governance and management" of the timber and building-products company. Predictably, Weyerhaeuser shares jumped nearly 5% that day, to approach a five-year high.

Two-and-a-half years later, Weyerhaeuser has sold some units and is considering selling others. But its profit, battered by the housing slowdown, fell 89% in the second quarter. Its shares traded yesterday at $67.63, slightly below the closing level on the day Franklin disclosed its stake.

That is a surprisingly common result of fund activism, according to a new study that challenges recent conventional wisdom about these cage-rattling investors.

The study by a Harvard Business School assistant professor, Robin Greenwood, and Michael Schor, a former student, found that activist funds are like a boxer with one punch: They are most successful when they prod managers to put a company up for sale. Shares of the target company typically rise, and all shareholders benefit.

But the authors found that activist investors have much less impact when a targeted company isn't sold. In those cases, the study found there is little change in the next 18 months in the company's stock price or financial results. That is true even when the company takes steps recommended by the activists, such as firing the chief executive, buying back stock or adding new directors.

"The money is in getting the target acquired," Mr. Greenwood says. "The ones that don't end up getting acquired don't end up with much of anything."

Mr. Greenwood concurs with other research showing that the appearance of an activist investor boosts a company's shares in the short run. He says other investors interpret these moves as a signal that a company is in play. But when the acquisition doesn't happen, there is little or no payoff.

Recent headlines point to a few examples. Wendy's International Inc. was trading at a split-adjusted $24 when investor Nelson Peltz began pushing management for changes in December 2005. Thanks to hopes for a sale, shares are now trading well above that level at $31.63. Wendy's board in late April said it would consider selling the company. In July, Mr. Peltz said he would consider paying $37 to $41 a share for the U.S.'s third-largest hamburger chain.

Investors in Time Warner Inc. got less benefit when activist investor Carl Icahn's campaign to break up the media titan fell short. Time Warner expanded its share buyback to $20 billion and cut expenses. But its shares were trading yesterday at $18.30, little changed from $17.97 when Mr. Icahn revealed his plans in August 2005.

Mr. Icahn says he made money on his Time Warner stake. He sold most of it toward the end of last year, when Time Warner's share price reached as high as $22. He says the expense cuts have boosted Time Warner's profitability.

More generally, Mr. Icahn says he and fellow activists like Mr. Peltz are effective, because directors and executives know they are willing to wage proxy fights to win board seats that could jeopardize managers' jobs. Studies like Mr. Greenwood's show more muted results, he says, because they include less-aggressive funds.

"I do think when we come in, at the very least, we get [executives] to refocus," Mr. Icahn says.

Mr. Greenwood acknowledges that some activist investors -- he includes Mr. Icahn -- are more effective than others. But he says it is no surprise that profits don't soar at many companies targeted by activists. "They're investors. They're not operating guys," he says. "They understand that this firm can be bought or sold at a higher price."

Likewise, Michael Embler, chief investment officer of Franklin Mutual Advisers, says the fund has been more effective at Weyerhaeuser than it appears at first glance. He notes that Weyerhaeuser stock traded for $87 in February, before the magnitude of the housing slump was apparent. Mr. Embler says Weyerhaeuser's shares might have lost value in the past 2½ years, were it not for the steps taken after his fund got involved. "I'm not sure that where the stock is today is a reflection one way or another on the success of activist investing," he says.

The study has academic critics as well. Alon Brav, an associate professor at Duke University's Fuqua School of Business, was co-author of a study released last year that found a bigger influence from activist funds.

Mr. Brav's group found that profitability rose at targeted firms, although the increase was small and typically took more than a year to appear.

For investors, Mr. Brav notes, these distinctions may matter little. Investors don't know which targets will be acquired. He and Mr. Greenwood agree that investors would still be wise to buy the stocks of any company attracting the attention of activists.

For the past few years, that was a good strategy, as a steady supply of buyout money fueled many acquisitions of companies targeted by activist funds. Now, that money has largely evaporated amid the credit crunch. So activists' ability to transform companies will be more seriously tested."

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