Money’s cheap; hedge fund activists fuelling record bid premiums. What’s an IRO to do?

Life has been good for those who run hedge and private equity funds. Borrowed money is cheap, buyouts are easy to pull off, bid premiums higher than since the dot com boom, and the stock markets are rushing ahead. In 2006 hedge funds increased their assets by 24% to $1.9 trillion, while private equity funds raised a record $215 billion for $1.7 trillion in assets.

Meanwhile mergermarket, the M&A intelligence and research service, has published its most recent Survey of Market Makers. Key conclusions? The debt market is expected to sustain mega-buyouts, SBOs will continue to be the most popular exit route, and shareholder activism and hedge funds are contributing to the ongoing boom. Nearly 50% of respondents see shareholder activism as a catalyst for M&A activity. And respondents believe hedge funds are increasing the competition for M&A targets.

Timely then that NIRI, the US Investor Relations Institute should publish its guide “Hedge Fund Activism: What You Need to Know and What You Can Do About It”.

In very brief summary, the guide suggests:

1. Understand where unlocked value potentially exists in your corporation, such as
under-leveraged assets; excess cash; the need for restructuring, untapped merger, acquisition or joint venture opportunities. Activist hedge funds will have already completed their due diligence before investing in your company.

2. Assess what hedge fund activists are looking for from your company. Learn about decision-making processes in individual hedge funds. Will they talk with management or do they have a history of waging nasty public campaigns?

3. Maintain accurate information on your shareholders; identify hedge fund activists. Approximately 75-100 of the 8,000 hedge funds worldwide are known activists, and only 200 firms control 75 percent of all assets. However given the limitations on public disclosures of holdings – especially of CFD’s and other derivatives (see earlier postings) - this is much easier said than done.

4. Form a rapid response team and protocol to respond. Assemble a "first response" team with a protocol that will be initiated immediately if an activist fund makes demands.

5. Communicate regularly with shareholders and gather feedback. Take these actions if your company has been identified as a target:
* Engage the rapid response team and protocol.
* Track accumulation of shares by activist hedge funds. Determine if they are acting alone or in concert.
* Review the hedge fund's previous modes of operation, tactics and outcomes.
* Analyse hedge fund demands.
* Formulate options for your company's communication strategy and messaging.
* Meet regularly with the CEO and CFO.
* Brief board members, particularly those likely to be contacted by hedge funds.
* Monitor public statements made by the fund relative to your company.

7. Immediately open a channel of communication. Articulate your response, and respond immediately; open a dialogue. A common pitfall is ignoring the activist's overture.

However the outgoing investment ace Anthony Bolton sounds a note of caution as he steps down from Fidelity; the banks who are providing much of the cheap funding fuelling the boom, are heading for disaster. It is harder and harder to find value in large companies because of this liquidity boom. Nonetheless, NIRI’s guide will provide a checklist for those in need.