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Andrew Willis: When hedge funds become shareholder activists

Money Talks is a collection of daily columns from The Business Network, which airs weekday mornings on CBC Radio One at 5:45 a.m. ET (6:15 a.m. ET in N.L.).

By Andrew Willis, a columnist with the Globe and Mail
(Listen to the original audio)

Running a hedge fund used to be easy.

We went through a record-setting round of takeovers last year.Tthe hedge fund crowd would simply buy stakes in companies that were being acquired, wait for the deal to actually close, and pocket a tidy little profit. Billions of dollars were invested using this basic strategy.

But now we are into a credit crunch.Takeover traffic has dropped of dramatically. Yet those hedge funds are still sitting on billions of dollars, and they don't get paid if they don't put that money to work.

So what are these highly caffeinated, ultra-aggressive money managers doing? They are creating takeovers and other events that move stock prices, all by themselves.

The academics call this activism - when institutional shareholders try to force underperforming companies to put themselves up for sale, or take other drastic steps to pump up the stock price.

Some of Canada's more prominent CEOs call what the hedge funds are doing a pain in the keister.

Look at TransAlta, the big Calgary utility. CEO Steve Snyder has to deal with a U.S. hedge fund that's demanding he take on $2 billion of new debt, simply to buy back shares. The hedge fund is totally comfortable with the fact that this would leave TransAlta as a junk bond utility. Mr. Snyder is totally opposed to wrecking his balance sheet. So there's going to be an expensive and distracting fight.

Over at Nexen, a $17 billion oil company, the hedge funds want CEO Charlie Fisher to bust up the company. Again, the boss is not exactly enthused about blowing up something he spent a life time building.

Get used to the activists. They've got a lot of money, and they need to put it to work. Sometimes, they have good ideas. On other occassions, these funds are blatantly self serving. But until the takeovers come back, the hedge funds are going to be a big part of corporate Canada.

--Andrew Willis

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