Sunday, September 19, 2010
Hedge Funds and Governance Targets: Long-Term Results, by William W. Bratton, University of Pennsyvlania Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN. Here is the abstract:
This article takes a second look at a database of 114 activist hedge fund engagements commenced between 2002 and 2006. The first look at the database, published as “Hedge Funds and Governance Targets,” 95 Georgetown Law Journal 1375 (2007), covered developments through December 31, 2006, and so caught most of the engagements at midstream. This second look tracks the engagements through mid 2009, providing an extended look at governance engagements by activist hedge funds. The number of engagements remaining open has fallen from 63 percent of the sample to 20 percent. Closure across most of the sample facilitates deeper inspection of the results. The financial yield, however, is disappointing. The hedge funds prove better at extracting target concessions and getting into boardrooms than at yielding long-term, market-beating financial gain. On the one hand, activist intervention led to something tangible in 88 percent of the cases, whether an asset sale, a stepped up cash payout, a board seat, or a legislative concession. On the other hand, only a minority of the targets’ stock prices beat market indices over the period of engagement, with financial underperformance being particularly notable in cases where the hedge fund entered the target boardroom. Overall, the hedge funds’ talents appear best suited to address matters that can be interrogated from outside the target. Any of a cash disgorgement, an asset sale, or a sale of the target as a whole can be planned based on publicly available information. Other value-creating initiatives, like reducing operating costs or otherwise enhancing business plans, call for hands on confrontation with the fuller set of information available only on the inside. The results here yield no overall evidence of constructive input at this level.