Activist Investors and what the Harvard Business Review thinks

Guys, not confident with which stock to pick for our next meeting? How about becoming an activist investor: buy a ton of shares in a distressed stock until you have enough voice to call an EGM, and maybe oust the management?

Ok, so realistically speaking, you probably aren't going to be able to afford to do that, let alone get anything done in time for next Sunday, but that doesn't keep this kind of thing from being commonplace.

This article is an interesting look into a meddling hedge fund who is trying to fix things at the New York Times by replacing the management:

Hedge Fund Seeks to Sway New York Times

How does this happen? Well when Dave told you that purchasing stocks means you own a little part of the company, he wasn't kidding. And with ownership comes the power to make decisions and change things. Oftentimes, a CEO or other members of the executive suite are tossed out by angry shareholders for doing a shitty job. Other times, it is by people/organizations which had no previous ownership, but merely bought into a company to turn it around with new management, and sell their stake once the value went up again.

Other times, they step in to simply sell off a lot of the assets, like cash, accounts receivable, or inventory, all of which can be sold very quickly. Sometimes, even less liquid assets like PPE [plant property and equipment] are considered. These assets are sold when they are worth more collectively than the company's market cap.

Carl Ichan is a famous example of one of these guys, oftemtimes called corporate raiders.

Interestingly enough, a recent issuing of the Harvard Buisness Review included an article written by Robin Greenwood and Michael Schor, entitled "When (Not) to Listen to Activist Investors," which offered a different opinion.

According to the article: "on average, a company that alters strategy in response to activist shareholders won't see stock gains that outperform the market - that is, unless the company is taken over." This is not the case for Harbinger capital, which just wants to scrap some of the NYT's assets.

The article goes on to say: "Our findings shouldn't be surprising. Activists are investors, not managers, and their real talent lies in identifying undervalued assets, not in determining the right steps to fix them."

This ties in well with all the recent hubbub about Soverign Wealth Funds as well - especially in terms of middle east ones, many of whom are interested in completely owning some companies, instead of purchasing large stakes in them. Because the talent out there is not yet as solid as it is in the states, and because these SWFs are buying up so much, will we have to worry about poorly managed companies in the near future?

At least for the time being, this will probably not be the case for Harbinger and the NYT, as is reported in the article: "Harbinger's nominees have 'deep expertise' in capital allocation, Internet media and brand strategy."