(FROM THE WALL STREET JOURNAL 11/27/15)
By David Benoit
Some of Wall Street's most aggressive investors are taking on a
gentler role: friend to companies in transition.
Activist hedge funds have made big bets on companies such as
General Electric Co., Mondelez International Inc. and 21st Century
Fox Inc. that have recently changed course via breakups or major
cost cutting.
Usually, it is the activists who push for such changes in hopes
of boosting a company's stock. With these investments, however,
they are trying to signal to the market that the companies are on
the right track, while putting themselves in a position to nudge
them back on course if discipline falters.
This week, Elliott Management Corp. disclosed a 6.4% stake in
Alcoa Inc. after the company's decision in September to split in
two, separating its parts-making business from its raw-aluminum
operations.
Elliott executives believe Alcoa can improve margins further,
but are supportive of the split, people familiar with the matter
said.
Some investors question whether the fees they pay to put their
money in activist funds are warranted if their managers are pushing
less significant changes. Hedge funds typically charge investors a
2% fee on total assets and take 20% of profits.
"It really begs the question, as it relates to activism, what is
the true portfolio purpose?" said Jonathan Grabel, chief investment
officer of the Public Employees Retirement Association of New
Mexico. "They need to articulate to investors what their role is as
they go after different opportunities."
In October, Trian Fund Management LP said it had taken a $2.5
billion stake in GE. Rather than a call for action, the fund sees
the investment as a stamp of approval on the conglomerate's
decision to narrow its focus.
When Trian announced the stake, GE's shares had barely budged in
the six months since the company said it would shed most of GE
Capital. But they have since topped $30 for the first time in seven
years. Trian, which has a reputation for urging conglomerates to
break up, believes the stock could be valued in the range of $45,
including dividends.
"It's somewhat counterintuitive, but companies that are in the
early stages of a turnaround may actually enter a new window of
vulnerability," said Kevin Daniels, head of Bank of America's
activism-defense practice.
GE has welcomed the activists and said it generally shares their
outlook.
Mondelez had already been through a corporate breakup that
separated the snacks company from a slowing grocery business at
Kraft when William Ackman's Pershing Square Capital Management LP
disclosed a $5.5 billion stake in August.
The maker of Oreo cookies and Ritz crackers also had added Trian
co-founder Nelson Peltz to its board a year and a half earlier and
was in the process of cutting costs. Mr. Ackman urged more cost
cuts and suggested that the company consider a sale.
The timing of Mr. Ackman's investment surprised Mondelez Chief
Executive Officer Irene Rosenfeld given the amount of work the
company had already done, a person familiar with the matter said.
Both sides said the talks have been cordial since his arrival.
Mondelez shares are up about 21% this year but down about 3%
since Mr. Ackman disclosed his stake.
Activists do sometimes take completely passive stakes, more like
a traditional hedge fund, but it is rare for them to make their
biggest investments in companies they don't intend to shake up.
Mondelez is the largest single bet in Pershing Square's history,
as GE is for Trian.
The investments may reflect the fact that activists have a lot
more money to work with. Investors have poured around $130 billion
into funds such as Trian's or those run by Pershing Square and
ValueAct Capital Management LP, roughly double the war chests
commanded by activists as recently as the end of 2012, according to
hedge-fund researcher HFR.
Activist funds also tend to have concentrated portfolios, often
with fewer than 10 positions, because of the cost and time required
to research and plan a campaign.
Some activists have long used a lighter touch with the companies
they target.
ValueAct disclosed a sizable stake in 21st Century Fox in August
2014, about a year after the company spun off its less profitable
newspaper and publishing assets, including The Wall Street Journal.
Following its usual playbook, the fund didn't make any public
demands of the company.
The company nominated ValueAct CEO Jeffrey Ubben to its board in
September. Mr. Ubben supports 21st Century Fox's new chief
executive, James Murdoch, and the investor believes he can add
value as a board member and adviser, people familiar with the
matter said. Shares of 21st Century Fox have fallen about 22% this
year.
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John W. Miller contributed to this article.
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(END) Dow Jones Newswires
November 27, 2015 02:47 ET (07:47 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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