In light of the shareholder activism discussed in the case of Zoran Corp, I thought I would share two academic studies that have looked into the sources of excess returns associated with companies that have activist hedge fund shareholders.
Value Creation or Destruction? Hedge Funds as Shareholder Activists
By Christopher P. Clifford, University of Kentucky
[F]irms which are targeted by hedge funds for active purposes earn larger excess returns than a control group of firms that are targeted by the same hedge funds for passive purposes. Firms targeted by activists experience increases in operating performance (ROA) following the acquisition of the block. These operational improvements appear to be driven by the divestiture of underperforming assets.
Stock Picking in Disguise? New Evidence That Hedge Fund Activism Adds Value
By Benjamin S. Solarz, Yale University
Controlling for differences in target firms, activist investments outperform the same hedge funds’ passive investments. .. [O]ver two years, they earn 18.4% greater returns; and measured by financial statements, they improve margins and ROA, increase payout and leverage, reduce balance sheet assets, and sell their targets more frequently and for higher prices.
Hedge funds follow five cohesive activist strategies: they (1) improve business strategies, (2) advise on mergers and acquisitions, (3) demand that target firms sell themselves, (5) optimize capital structures, and (5) fix corporate governance. These results imply that skilled hedge funds can add significant value as corporate partners.
(See Appendix B for some fantastic excerpts of hedge fund letters to corporate managements!)
Ramius Capital also has an argument that closely aligns with the results of Solarz’ study. It can be found here. Ramius concludes that shareholder activism is a multi-dimensional investment strategy that creates shareholder value and improves corporate governance.
Talk to Frank about Shareholder Activists.
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