The credit squeeze

There's quite a perceptive Lex column in today's Financial Times.

The item that especially caught my attention concerned activist investors and the effects of the present credit squeeze on their strategies.

The columnist means by "activist investors" not the folks who are interested in, say, a businesses' carbon footprint or whether it does business with Burma. He means the investment funds that seek to make a profit off of pressing managements for changes -- telling the managers, sometimes through the mechanism of an actual or threatened proxy fight, that they should merge with somebody, or sell off non-core subsidiaries, or initiate a stock buy-back program, etc.

This has become a more difficult way of making money than it used to be. The reason? In order to do this, you have to start off with a substantial chunk of a company's stock, and you (the activist) would generally acquire that chunk with borrowed money. Obviously, as money gets harder to borrow in relevant quantities this gets more complicated.

But that's not the worst of it. For as credit gets tight, its harder to make the case for dividend pay-outs or stock buy-backs. Management push-back against such proposals will be more vigorous.

The spin-off of non-core assets gets more difficult, too. Spin them off to whom? Who is buying these days?

"Many activist funds" the FT tells us, "may be in for a long, hard slog."