Hedge Fund Activists: “Corporations, Its Time to Hit the Gym”

Carl Icahn, Trian Fund Management, JAT Capital Management, and Third Point are all hedge fund activists. More importantly, they are hedge fund activists who seem to love spin-offs. And I am not talking about television shows; I am talking about giant corporations being forced to spin-off their businesses into separate entities by hedge fund activists.

Hedge fund activist Carl Icahn is said to have played a major role in eBay’s decision to spin off its PayPal business from its Marketplace business early next year. According to a recent article by Wall Street Journal, Mr. Icahn is said to have proposed the split as early as January this year. He had to wait as late as September before eBay, with a little push from Apple Pay, finally caved in and decided to split. Moral of the story: patience pays, even for hedge fund activists!

The trend seems to be fast catching up. In the month of October alone, a number of companies have decided to split, whereas some are exploring a split. Hewlett Packard and Symantec Corp. have already voted yes, while DuPont Co, Madison Square Garden Co and Amgen Inc are currently in the maybe (soon-to be-yes) phase. And in most of these cases, the driving forces seem to be hedge fund activists. Trian Fund Management is pushing DuPont and Madison Square Garden, and according to an article in Wall Street Journal, it was only a few days ago that Third Point LLC took a stake in Amgen and started pushing it for a split.

So what could be the reasons, which prompt hedge fund activists to take stake in companies and urge them to split? It could be because post-split, the individual entities could become potential M&A candidates. Or it could simply be because hedge fund activists believe leaner companies would be easier to operate.

The reason my vote would go for M&A is because takeovers seem to be the most popular activist outcome, according to a recent research by professors Marco Becht, Julian Franks, Jeremy Grant and Hannes F .Wagner. In their working paper titled “The Returns of Hedge Fund Activism: An International Study”, they studied almost 1800 hedge fund activist cases across Asia, Europe and North America, and found out that takeovers were the most popular  activist outcomes in North America. Michael Schor and Robin Greenwood of Harvard Business School, in their paper, “Investor Activism and Takeovers” also support M&A after they found out that it is the ability of a hedge fund activist to force the companies to get acquired that generated abnormal stock returns for the respective shareholders.

Academic research, therefore, seems to be pointing out that hedge fund activists could urge giant corporations to split so that the individual entities could become ideal M&A candidates and get acquired, thereby generating maximum  returns for the shareholders.  And for eBay, that seems to be the motive. PayPal is tailor-made as an acquisition candidate and when the split happens next year, I would expect companies like Google and Alibaba to swoop in and bid. And as for other candidates, we will have to adopt a wait-and-watch approach.

 Hedge fund activists are on the rise. In an earlier article, I had pointed out that the number of hedge fund activist launches this year jumped to 28 from only 12 in 2013. And as the number of trainers keeps increasing, expect more corporations to join the gym and start losing weight, courtesy of spin-offs.