Hedgehogging the agenda

The sheer audacity is breath-taking: exploit a little-known loophole in
company law to use a minuscule stake to demand change at mobile phone giant
Vodafone.

John Mayo, the former finance director of Marconi, bought a 0.0004% stake in
Vodafone with his investment vehicle, Efficient Capital Structures. ECS then
demanded the company derive more value from its 45% stake in US phone company
Verizon Wireless.

Welcome to the new breed of shareholder activist: today’s finance directors
are facing an aggressive challenger – the hedge fund manager.

Mayo’s ECS is the latest in the growing list of hedge funds that are not
afraid to use small stakes to demand big changes. Atticus recently demanded that
Barclays drop its bid for ABN Amro, only months after another hedge fund, The
Children’s Investment fund, or TCI, demanded the breakup of ABN.

The very nerve…
As the size of assets managed by hedge funds has increased, so too has their
audacity. Funds are buying a big enough stake in companies and then digging
deeply into the financial statements.

John Godden, chief executive of hedge fund advisory firm IGS Group, says,
“The hedge funds are able to punch above the weight of their stakes in the
company by carrying out thorough research and then making a lot of noise by
briefing the press. This has not been the style of traditional fund managers.”

Even if the hedge fund can force the company into a shareholder vote, it
cannot force through changes, as its stake in the company is too small. But if
it gets its message out into the public arena and into widely read publications,
it can then rally support from other shareholders to help push through their
demands.

For such a strategy to succeed, the hedge fund needs to touch a nerve that
larger, more traditional fund managers may have already discussed behind closed
doors.

“If you look at the recent spate of demands made by hedge fund activists,
they are often supported by bigger shareholders who do have the necessary weight
to push through the changes,” says Godden.

Godden says FDs ignore questions from a hedge fund manager with a tiny stake
in the company at their peril, as they could ultimately rally support from far
more influential shareholders.

With hedge funds set to quadruple in asset size over the next seven years,
this is only the beginning of hedge fund activism, says Godden. “It’s just going
to get bigger because of the sheer weight of money that’s flowed into hedge
funds and is now at the discretion of some pretty powerful individuals.”