August 13, 2005
An Example of The New Strategy of Hedge Funds: Wendy's
Several months ago a hedge fund announced that it had taken a position in Wendy's stock. The company's performance and stock price had been flat for some time. The fund had scoured Wendy's operations and decided that it could increase the value of the stock by spinning off a part of its operations (Tim Hortons). Immediately, other hedge funds piggybacked on the initial funds research and took similar positions. With the hedge funds holding a substantial majority of the stock, they approached Wendy's management and argued for the spin off. Management, although initially reluctant, responded by announcing a restructuring and the stock price jumped. The hedge funds cashed out and so did Wendy's senior managers, exercising millions in options.
This is the new form of takeover, the non-takeover takeover. Hedge funds do not have to buy legal control to get there recommendations tested in practice. They buy temporary, effective control by combining resources with each other. Aggressive hedge funds accumulate powerful minority stakes in the stock and announce publicly their recommendations for increasing a company's stock price. Management resistance melts as other investors support the idea and as executives, flush with options, decided that they too can cash in if the idea has merit.
One should note that Wendy's management did not come up with the restructuring on its own -- it came from the outside. It is further support for the now well known management tendency to favor holding assets or favor growth when retrenchment would increase shareholder value.
August 13, 2005 | Permalink
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