Monday, August 09, 2010

What Goes Up Might Come Down - Less 20% or So....

Having periodically spit venom at some notorious Japanese activists for pursuing business models that (at least in this observer's opinion) were rather obviously on a collision course to enrich themselves to a far greater extent than their less-fortunate investors, I was pleased to see the recent working paper released last quarter by Hamao, Kutsuna and Matsos entitled "Activist Investing in Japan: The First Ten Years".

The abstract echoing some of my sentiments, and noteworthy of attention for allocators reads:
This paper provides a comprehensive look at the first decade of foreign investor activism in Japan, the second largest stock market in the world with many underperforming and cash-rich firms. Barriers to shareholder activism have historically been high but we document an unprecedented wave of block acquisitions by hedge fund and other investors with a total of 916 stakes reported in the period between 1998 and 2009. There is, on average, a modest positive stock price reaction to the announcement of activist investments, particularly for events involving hostile funds. The long-run returns on activism are low overall, but positive for events involving hostile funds. We find that while activists have forced target firm managers to increase their payouts compared to peer firms, there is no evidence of major operational improvements or restructuring. Finally, after 2006 there was a widespread adoption of "poison pills" by firms, particularly those targeted by activists, and a subsequent drop in investor activism. Our paper illustrates the limits to shareholder activism in a country where the takeover market is thin and cannot be used by the activist investor as an exit strategy.

My vilification has NOT been of the seeming opportunity, nor of the potential benefits to shareholders (and society) of energizing possibly moribund managements, but rather the Activists apparently cynical disregard of their own shareholders by using the weight of new money (or available leverage) to goose prices of existing positions well-beyond the levels of a reasonable exit to either a trade-buyer or private equity buyer, or even levels that make sense for management to buyback shares, presumably for the sole purpose of parochial gain - notably around incentive-fee crystallization dates. In other words: the racket of unsuccessful pursuit. While the authors do not address my specific pet-peeve, their aggregate data do suggest pedestrian returns indicative of (at least in part) the omnipresent agent-principal conflicts of the investment manager, who by all account have not made out poorly despite the rather modest aggregates.

Errrrr...ummm....Did I hear someone say "Multi-Year Clawback Clauses"??!?

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