May 4, 2005
Well known hedge funds have filed 13(d) statements (under the 34 Act), disclosing ownership positions in excess of 5% for both Wendy's and General Motors in the past week. This could get very interesting.
The hedge funds have decided to hunt in packs, which means that a single 13(d) statement will attract other hedge funds (and some of the more aggressive private equity funds) who will also take positions in the target stock. The followers often buy less than a 5% stake and do not file a 13(d) becasue they are not "in concert" with the orginal filer. In a matter of a few days, the hedge funds can hold 30 to 35% of the outstanding stock.
The funds then approach the target board and demand structural changes in the company -- declare a dividend, spin off or liquidate a division, stop an acquisition, and, in extreme cases, put the company up for sale. Once the company makes the change the funds hope to sell their shares on the stock price runup. If the funds are correct that the requested change will unlock shareholder value, the funds make money.
This is another example of how major corporate goverance changes in the United States often come from outside the company. Other examples include proxy contests, dissident shareholder pressure from institutional investors, government prosecutors (Spitzer or the SEC), takeovers (particularly LBOs), and, finally, bankruptcy reorganzations. What is notable about the hedge fund involvement is that the funds have concluded that the old methods employed by management for resisting takeovers can be beat. Their strategy depends on their success in pressuring a board to make the suggested changes.
Watch Wendy's and General Motors to see if the hedge funds are correct. Companies are not defenseless (among other things they may sue for a violation of 13(d)'s or 14(d)'s group action rules).
May 4, 2005 | Permalink
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