Ramius Capital, an activist hedge fund we have had reason to discuss here before, has put out a white paper, "The Case for Activist Strategies."
I read these things so you don't have to.
Here are five key points from the paper:
1) It traces the recent prevalence of activist strategies in part to Eliot Spitzer. Spitzer successfully pushed for certain reforms back when he was New York's attorney general that had the consequence of pushing professional analysts away from the sell side. Unsurprisingly, those analysts have found another lucrative use for their skill set: on the buy side.
2) A crowding-out effect is observable in the empirical data on this strategy. This is a textbook point: if a business plan works often enough to draw emulation, the emulation will reduce the profitability of that plan. Specifically, "the average benchmark adjusted return attributed to hedge fund activism ... declined during the 2001 to 2006 time period."
3) Many activist investors have had negative results in 2008. This is not, Ramius assures us, a defect in the strategy, "the performance of top-tier managers relative to equity indices has been outstanding."
4) Even in the case of not-so-outstanding results, the authors of the white paper don't want us to fault the strategy, because macroeconomic factors and technical pressures "completely overwhelmed fundamentals [last year], causing companies to trade at or below intrinsic value despite the activist manager's otherwise thoughtful plan to unlock value."
5) When allocating capital to an activist investor, it is a good idea to consider that they aren't all the same, and that the best variants of the strategy for the present climate may be those that push primarily for strategic or operational change (rather than financial or governance changes).
Showing posts with label Eliot Spitzer. Show all posts
Showing posts with label Eliot Spitzer. Show all posts
Monday, January 19, 2009
Wednesday, January 2, 2008
Eliot Spitzer and research
Another of the causes associated with Spitzer during his A-G days was the clamp-down on sell-side research.
Investment banks and brokerage firms have research departments that sell reports into the market. Sometimes the price of these reports comes bundled into brokerage commissions. In other words, a broker says to a stock trader/buyer, "pay my commissions and you get access to my institution's reports/analyses for free."
Of course, it isn't for free. TANSTAAFL. But it is included. This bundling is also known as "softing," or the use of "soft dollars."
At any rate, there is an obvious danger of conflict of interest present in institutional mingling of research and the business of selling stock. Is the researcher writing a true analysis, or an advertisement that's supposed to look like an analysis?
During the late 1990s dotcom and telecomm boom, a Solomon Smith Barney analyst, Jack Grubman, became notorious for his cheerleaderish ways. He actually attended meetings of the board of directors of WorldCom, a Smith Barney client, obviously a big no-no according to traditional ideas of arms-length analysis.
Of course his reports on the value of WorldCom's stock were enthusiastic. He told investors they should "load up the truck" with the stuff.
Investors who believed him kept loading up until that truck drove off a cliff.
Grubman was the most notorious such "analyst," but there were clearly others, and in reaction to such stories, Spitzer pressed for and got a "global settlement" from industry that chganged the way research is done.
There's something to be said for Spitzer's work in this line.
One ought to note, though, that the real problem is the boom-bust cycle itself, and a national monetary policy that encourages the cycle. At the top of a boom, there is always a lot of "irrational enthusiasm," and Grubmans will appear in some form or other. To attack the particular form in which the latest Grubman appeared will, for the most part, simply cause a change in the formalities, until the United States as a country can work toward an evenly-rotating economy, one without the bipolar affect.
These last three days have been enough on the subject of Governor Spitzer's present and his past. I'll be back with another entry here Sunday, and I hope then to return to the core concern of this blog -- proxy fights, and the folks who wage them.
Investment banks and brokerage firms have research departments that sell reports into the market. Sometimes the price of these reports comes bundled into brokerage commissions. In other words, a broker says to a stock trader/buyer, "pay my commissions and you get access to my institution's reports/analyses for free."
Of course, it isn't for free. TANSTAAFL. But it is included. This bundling is also known as "softing," or the use of "soft dollars."
At any rate, there is an obvious danger of conflict of interest present in institutional mingling of research and the business of selling stock. Is the researcher writing a true analysis, or an advertisement that's supposed to look like an analysis?
During the late 1990s dotcom and telecomm boom, a Solomon Smith Barney analyst, Jack Grubman, became notorious for his cheerleaderish ways. He actually attended meetings of the board of directors of WorldCom, a Smith Barney client, obviously a big no-no according to traditional ideas of arms-length analysis.
Of course his reports on the value of WorldCom's stock were enthusiastic. He told investors they should "load up the truck" with the stuff.
Investors who believed him kept loading up until that truck drove off a cliff.
Grubman was the most notorious such "analyst," but there were clearly others, and in reaction to such stories, Spitzer pressed for and got a "global settlement" from industry that chganged the way research is done.
There's something to be said for Spitzer's work in this line.
One ought to note, though, that the real problem is the boom-bust cycle itself, and a national monetary policy that encourages the cycle. At the top of a boom, there is always a lot of "irrational enthusiasm," and Grubmans will appear in some form or other. To attack the particular form in which the latest Grubman appeared will, for the most part, simply cause a change in the formalities, until the United States as a country can work toward an evenly-rotating economy, one without the bipolar affect.
These last three days have been enough on the subject of Governor Spitzer's present and his past. I'll be back with another entry here Sunday, and I hope then to return to the core concern of this blog -- proxy fights, and the folks who wage them.
Tuesday, January 1, 2008
Eliot Spitzer and mutual funds
Spitzer, before his present term as Governor of New York began, was the state's Attorney General. This is an elective post in NY. He first won it in 1998, and won re-election easily in 2002.
He reconceived the role of that office, making himself the "sheriff of Wall Street." Probably two investigations stand out in that regard: one into market-time and late trading within mutual funds; one into the influence of investment banks upon market research.
As to mutual funds, it came to Spitzer's attention beginning in 2003 that certain managers of publicly traded mutual funds were allowing favored clients to engage in two practices that seemed to guarantee them (the favored) easy profits.
One of these practices was "late trading," i.e. the favored ones would file trades at the previous day's price after the market close. The other was "market timing," i.e. the purchase or sale of shares in the funds more frequently than allowed under the funds publicly published rules.
The cool thing about bringing actions against white-collar defendants (as another aspiring prosecutor/poltician, Rudy Giuliani, had discovered before Spitzer) is that there is no equivalent of the code of silence that often obtains among more hardened criminals. The public accusation, and the "perp walk" if matters go that far, is itself a devastating blow to most of Wall Street's denizens, and they'll often tell the enforcement authorities what they want to hear, or sign a consent decree, much more readily than their counter-parts.
The suspicion has gathered itself around both Spitzer's and Giuliani's handiwork, then, that they were picking off low-hanging fruit.
Nearly all of the mutual fund managements whom Spitzer charged with allowing market timing or late trading settled, so he didn't have to prove wrong-doing in court. He got his consent decrees, got fines, re-organized the industry under threat of continued vigilance, and took his bows.
The one instance in which someone did fight, interestingly, didn't go well for his office. in August of 2005 Spitzer the only trial arising from these investigations ended indecisively. A jury could not reach a verdict on all counts in a case brought against Theodore Sihpol, III, a broker with Bank of America who introduced the hedge fund Canary Capital to that bank.
Canary was the supposedly favored trader, indeed the first one targeted by Spitzer's investigations into this practice -- Sihpol its supposed puppet allowing the shenanigans.
After a hung jury, the state could of course have pressed for another trial. But both parties had had enough,so that in October 2005, the Mr. Sohpol settled a follow-up case that the SEC had brought in the wake of Spitzer's charges (agreeing to pay a $200,000 fine and accepting a five-year ban from the securities industry) and the state of New York withdrew all remaining charges against Mr. Sihpol.
The Washington Post, in reporting on the October resolution, quoted a former federal prosecutor, Evan T. Barr, who spoke for many when he said: "The resolution of the case on such favorable terms for the defense certainly calls into question whether Sihpol should have been indicted in the first place."
But Spitzer had had two years of favorable publicity by then and was well on his way to the Governor's office.
I think Mr. Sihpol has an almost heroic stature under the circumstances, and I look forward to his return to the fray in 2010.
He reconceived the role of that office, making himself the "sheriff of Wall Street." Probably two investigations stand out in that regard: one into market-time and late trading within mutual funds; one into the influence of investment banks upon market research.
As to mutual funds, it came to Spitzer's attention beginning in 2003 that certain managers of publicly traded mutual funds were allowing favored clients to engage in two practices that seemed to guarantee them (the favored) easy profits.
One of these practices was "late trading," i.e. the favored ones would file trades at the previous day's price after the market close. The other was "market timing," i.e. the purchase or sale of shares in the funds more frequently than allowed under the funds publicly published rules.
The cool thing about bringing actions against white-collar defendants (as another aspiring prosecutor/poltician, Rudy Giuliani, had discovered before Spitzer) is that there is no equivalent of the code of silence that often obtains among more hardened criminals. The public accusation, and the "perp walk" if matters go that far, is itself a devastating blow to most of Wall Street's denizens, and they'll often tell the enforcement authorities what they want to hear, or sign a consent decree, much more readily than their counter-parts.
The suspicion has gathered itself around both Spitzer's and Giuliani's handiwork, then, that they were picking off low-hanging fruit.
Nearly all of the mutual fund managements whom Spitzer charged with allowing market timing or late trading settled, so he didn't have to prove wrong-doing in court. He got his consent decrees, got fines, re-organized the industry under threat of continued vigilance, and took his bows.
The one instance in which someone did fight, interestingly, didn't go well for his office. in August of 2005 Spitzer the only trial arising from these investigations ended indecisively. A jury could not reach a verdict on all counts in a case brought against Theodore Sihpol, III, a broker with Bank of America who introduced the hedge fund Canary Capital to that bank.
Canary was the supposedly favored trader, indeed the first one targeted by Spitzer's investigations into this practice -- Sihpol its supposed puppet allowing the shenanigans.
After a hung jury, the state could of course have pressed for another trial. But both parties had had enough,so that in October 2005, the Mr. Sohpol settled a follow-up case that the SEC had brought in the wake of Spitzer's charges (agreeing to pay a $200,000 fine and accepting a five-year ban from the securities industry) and the state of New York withdrew all remaining charges against Mr. Sihpol.
The Washington Post, in reporting on the October resolution, quoted a former federal prosecutor, Evan T. Barr, who spoke for many when he said: "The resolution of the case on such favorable terms for the defense certainly calls into question whether Sihpol should have been indicted in the first place."
But Spitzer had had two years of favorable publicity by then and was well on his way to the Governor's office.
I think Mr. Sihpol has an almost heroic stature under the circumstances, and I look forward to his return to the fray in 2010.
Monday, December 31, 2007
Happy New Year, everyone
In yesterday's entry, I wrote about a story in this month's issue of Vanity Fair, one that concerned Mayor Giuliani's campaign for president and, in consequence, the law firm in which he is a name partner, Bracewell & Giuliani.
Today I'd like to stay within the four corners of VF. For it has another story with at least a tangential relationship to the themes of this blog: David Margolick's article on Governor Elior Spitzer of New York, and the tough year he has had in Albany.
The reason that's of interest to Proxy Partisans, of course, is that in his last job, as state attorney general, Spitzer put himself front-and-center as the "sheriff of Wall Street." In his view, the SEC wasn't doing its job, so he would.
Margolick contends that Spitzer developed a model of "strategic craziness" -- planned tantrums, really -- for getting what he wanted in terms of changes in the way business is done on Wall Street, but that this model, become a habit, has backfired on him.
He quotes an unnamed source explaining the difference between being a prosecutor and being a governor -- a difference that (this is the gist of the piece) -- Spitzer has yet to grasp: "If you're a C.E.O. at a company and I call and I say, 'I'm going to fuck you, I'm going to destroy you, I'm going to indict your company,' and I sound totally crazy, you hang up on the phone, and you go see your chairman of the board, and you say, 'This guy is crazy, we need to settle,' because you're given no option. If you're a state legislator and you get the same thing, you hand up the phone, you call the Albany Times Union, and you say 'This guy is crazy,' because you don't give a shit."
Perhaps tomorrow I'll look back upon Spitzer's days as New York A-G, especially in connection with two high-profile scandals (a) "market timing" in regard to mutual fund shares, and (b) the relationship between research and underwriting.
Today I'd like to stay within the four corners of VF. For it has another story with at least a tangential relationship to the themes of this blog: David Margolick's article on Governor Elior Spitzer of New York, and the tough year he has had in Albany.
The reason that's of interest to Proxy Partisans, of course, is that in his last job, as state attorney general, Spitzer put himself front-and-center as the "sheriff of Wall Street." In his view, the SEC wasn't doing its job, so he would.
Margolick contends that Spitzer developed a model of "strategic craziness" -- planned tantrums, really -- for getting what he wanted in terms of changes in the way business is done on Wall Street, but that this model, become a habit, has backfired on him.
He quotes an unnamed source explaining the difference between being a prosecutor and being a governor -- a difference that (this is the gist of the piece) -- Spitzer has yet to grasp: "If you're a C.E.O. at a company and I call and I say, 'I'm going to fuck you, I'm going to destroy you, I'm going to indict your company,' and I sound totally crazy, you hang up on the phone, and you go see your chairman of the board, and you say, 'This guy is crazy, we need to settle,' because you're given no option. If you're a state legislator and you get the same thing, you hand up the phone, you call the Albany Times Union, and you say 'This guy is crazy,' because you don't give a shit."
Perhaps tomorrow I'll look back upon Spitzer's days as New York A-G, especially in connection with two high-profile scandals (a) "market timing" in regard to mutual fund shares, and (b) the relationship between research and underwriting.
Tuesday, December 25, 2007
The class action against AIG
The usual drill in a class-action securities fraud lawsuit is to create a "class period," defined by two dates. Date A is that day on which the company should have disclosed some specific important piece of information. Date B is that day on which the public became aware of it anyway.
The class, then, consists of all persons who bought the defendant company stock between A and B. It is worth noting that just holding stock during that period doesn't make one a member of the class so defined. Nor does selling stock then have any relevance. The class consists of buyers within the class period.
The reason? only a buyer can claim to have been over-charged. The buyers are complaining that between A and B, the market price was higher than it would have been had the market in general been aware of the realities.
The filing against AIG last year fit this pattern. The class period begins in October 1999, on the basuis of a press release put out that month that described consolidated assets as $259 billion and shareholders' equity as $32.3 billion. The class period continues until October 2004, when the CBS MarketWatch issued an article headlined "Spitzer attacks insurance industry," which disclosed to the public (as the plaintiffs see it) that the kind of claims re: assets and equity the company had been claiming for fivce years were based on the manipulation of the financial statements.
The law firm that represents AIG is Paul Weiss Rifkand. It has argued that the plaintiff doesn't have a case for "scienter," or in layfolk term that they were knowingly committing fraud. They can't be held responsible for the fact that a New York State A-G would eventually get a bee in his bonnet about certain practices, after all. Did they understand that the accounting procedures and re-insurance deals at issue would result in pumping up the price of their stock?
That's enough work for me on a Christmas Day. Enjoy the holiday, all.
The class, then, consists of all persons who bought the defendant company stock between A and B. It is worth noting that just holding stock during that period doesn't make one a member of the class so defined. Nor does selling stock then have any relevance. The class consists of buyers within the class period.
The reason? only a buyer can claim to have been over-charged. The buyers are complaining that between A and B, the market price was higher than it would have been had the market in general been aware of the realities.
The filing against AIG last year fit this pattern. The class period begins in October 1999, on the basuis of a press release put out that month that described consolidated assets as $259 billion and shareholders' equity as $32.3 billion. The class period continues until October 2004, when the CBS MarketWatch issued an article headlined "Spitzer attacks insurance industry," which disclosed to the public (as the plaintiffs see it) that the kind of claims re: assets and equity the company had been claiming for fivce years were based on the manipulation of the financial statements.
The law firm that represents AIG is Paul Weiss Rifkand. It has argued that the plaintiff doesn't have a case for "scienter," or in layfolk term that they were knowingly committing fraud. They can't be held responsible for the fact that a New York State A-G would eventually get a bee in his bonnet about certain practices, after all. Did they understand that the accounting procedures and re-insurance deals at issue would result in pumping up the price of their stock?
That's enough work for me on a Christmas Day. Enjoy the holiday, all.
Wednesday, November 7, 2007
Hank Greenberg's Resources
Now to the big question, to cap off this week's entries.
If Greenberg's filing means that he does plan a comeback, putting himself once again at the helm of AIG, then what are his chances of pulling that off?
The most obvious point is that he still has admirers. There are people who believe AIG's stock price has suffered from his absense, and who'd love to have him back. The price was above $70 before Spitzer pressed the issue that led to his departure. It immediately sank to $50, although it didn't stay that far down for very long. There's been a lot of zig-zagging since, but as of the close of business yesterday, Nov. 6, the price was at $62.05.
Of course, Greenberg's admirers might be wrong. For all we know the stock price might have been at $62.05 right now even if Spitzer had never interested himself in AIG, and Greenberg had never left. Or, it might be at $100. Alternative-universe hypotheses are difficult to test. Still, there is some sentiment in his favor.
There is also the China connection. Recall that the company got its start there. More important, the whole world seems to be heading to China right now. Optimism about China is the engine that has kept the world economy moving over the past few months as the US and the European nations have suffered through mortgage-market related problems.
Greenberg is said to feel quite at home in China. He helped the PRC get into the World Trade Organization. Last year, Long Yongtu, the chief negotiator for China's entry into the WTO, said to an interviewer: "Mr. Greenberg is the most famous U.S. business leader in this country. Perhaps most important, he is a long-standing friend of the Chinese people."
That's the sort of connection one has to count as a resource in a struggle for corporate control.
(This post will be my last on Proxy Partisans until Sunday. I'll confine my blogging for the remainder of the week to Pragmatism Refreshed. cfaille.blogspot.com Feel free to drop by.)
If Greenberg's filing means that he does plan a comeback, putting himself once again at the helm of AIG, then what are his chances of pulling that off?
The most obvious point is that he still has admirers. There are people who believe AIG's stock price has suffered from his absense, and who'd love to have him back. The price was above $70 before Spitzer pressed the issue that led to his departure. It immediately sank to $50, although it didn't stay that far down for very long. There's been a lot of zig-zagging since, but as of the close of business yesterday, Nov. 6, the price was at $62.05.
Of course, Greenberg's admirers might be wrong. For all we know the stock price might have been at $62.05 right now even if Spitzer had never interested himself in AIG, and Greenberg had never left. Or, it might be at $100. Alternative-universe hypotheses are difficult to test. Still, there is some sentiment in his favor.
There is also the China connection. Recall that the company got its start there. More important, the whole world seems to be heading to China right now. Optimism about China is the engine that has kept the world economy moving over the past few months as the US and the European nations have suffered through mortgage-market related problems.
Greenberg is said to feel quite at home in China. He helped the PRC get into the World Trade Organization. Last year, Long Yongtu, the chief negotiator for China's entry into the WTO, said to an interviewer: "Mr. Greenberg is the most famous U.S. business leader in this country. Perhaps most important, he is a long-standing friend of the Chinese people."
That's the sort of connection one has to count as a resource in a struggle for corporate control.
(This post will be my last on Proxy Partisans until Sunday. I'll confine my blogging for the remainder of the week to Pragmatism Refreshed. cfaille.blogspot.com Feel free to drop by.)
Monday, November 5, 2007
The history of AIG
American Insurance Group is the sixth largest company in the world, according to Forbes.
It was founded by Cornelius Vander Starr, a native of California, of Dutch descent, 88 years ago, set up as a Shanghai-based operation selling insurance to the Chinese.
It was marvellously successful, and soon had operations around the world. Of course with the Communist takeover in the 1940s, the company moved its headquarters to New York.
Greenberg climbed up the corporate ladder as Vander Starr's protege, and became his successor when the company founder retired in the late 1960s. Soon thereafter, the company went public. Greenberg remained its chief for more than 35 years.
In October 2004 the New York Attorney General Eliot Spitzer, who has since become Governor, announced a lawsuit against Marsh & McLennan Companies -- a brokerage -- for steering clients to preferred insurers with whom the Company maintained lucrative payoff agreements, and for soliciting rigged bids for insurance contracts from the insurers.
Spitzer also announced in a release that two AIG executives had pleaded guilty to criminal charges in connection with all this steering and rigging.
The resultant brouhaha led to Greenberg's departure early the following year. In February 2006, the State of New York and the post-Greenberg management at AIG agreed to a settlement, including a fine of $1.6 billion.
Greenberg hasn't taken well to retirement. One doesn't get the impression that he's spent a lot of time at the Elba fishin' hole, kicking back with a brew. We'll get into what he HAS been up to, tomorrow.
It was founded by Cornelius Vander Starr, a native of California, of Dutch descent, 88 years ago, set up as a Shanghai-based operation selling insurance to the Chinese.
It was marvellously successful, and soon had operations around the world. Of course with the Communist takeover in the 1940s, the company moved its headquarters to New York.
Greenberg climbed up the corporate ladder as Vander Starr's protege, and became his successor when the company founder retired in the late 1960s. Soon thereafter, the company went public. Greenberg remained its chief for more than 35 years.
In October 2004 the New York Attorney General Eliot Spitzer, who has since become Governor, announced a lawsuit against Marsh & McLennan Companies -- a brokerage -- for steering clients to preferred insurers with whom the Company maintained lucrative payoff agreements, and for soliciting rigged bids for insurance contracts from the insurers.
Spitzer also announced in a release that two AIG executives had pleaded guilty to criminal charges in connection with all this steering and rigging.
The resultant brouhaha led to Greenberg's departure early the following year. In February 2006, the State of New York and the post-Greenberg management at AIG agreed to a settlement, including a fine of $1.6 billion.
Greenberg hasn't taken well to retirement. One doesn't get the impression that he's spent a lot of time at the Elba fishin' hole, kicking back with a brew. We'll get into what he HAS been up to, tomorrow.
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