Hedge fund activists need friends

Hedge fund activists need friends

Two scholars at the University of Warwick, Warwick Business School, in the UK, have written a paper on “the benefits of friendship in hedge fund activism.”

At the heart of the paper is the not-especially-astonishing news that hedge fund activists benefit from social ties, that is, from the ability to form, or to join, broad alliances with one another in their efforts to change corporate policy.

But there is value in confirming common sense intuitions. There is value in telling us, for example, that an apple a day really is a healthy part of a diet, and of quantifying its benefits. In that spirit, Yazhou (Ellen) He and Tao Lu, explain to us that “the presence of connected funds … contributes to the activist’s campaign success.”

Onto the Bandwagon

The paper begins with an example of activism from the spring of 2007. GAMCO Investors, via Schedule 13D, disclosed a 5.4% stake in Intermec Inc., a manufacturer of barcode readers and other workflow products. The SEC filing said that GAMCO and its affiliates “may suggest or take a position with respect to potential changes in the operations, management, or capital structure,” as a way of enhancing shareholder value.

During the 60-day period prior to this announcement, Transamerica Asset Management had accumulated 0.6% of Intermec’s outstanding stock. On one day, 24 days before the GAMCO announcement, Transamerica bought 198,600 shares of the target company, more than three tenths of the average daily volume of the stock.

This would turn out to be a long play for both investment funds, but in the end a successful one. Three years after this filing, GAMCO announced its intention to vote “abstain” on the company nominees for the board at the annual meeting that year, 2010. Then in 2012 (GAMCO by this time owned 11% of Intermec), it supported another investor’s demand that the company look for a buyer. Months later, Intermec did in fact agree to be purchased, by Honeywell, at a premium of 25.3%.

So, focusing on timing of Transamerica’s decision to clamber on board the bandwagon, He and Lu observe that Patricia L. Sawyer, who was a director of Transamerica at the time (and had been since 1993) had significant links to John C. Ferrara, an important executive at GAMCO.  Ferrara had been Director for financial planning and analysis American Express in the late 1980s, when Sawyer was vice president there.  The authors hypothesize that this social connection between Ferrara and Sawyer “may have facilitated information flows between the two funds, which could have influenced Transamerica’s decision to purchase the Intermec stock….”

A Database and Some Numbers

To get beyond anecdotes, though and “test whether information is spread via the social network between the lead activist and institutional investors,” He and Lu study such connections in the aggregate for a database consisting of all hedge fund activism events from 2005 to 2014. They conclude that”a connected institution is 2.9 percentage points more likely to increase its portfolio weight in the target firm” than is one unconnected to the activist.

They crunch the numbers in several different ways to be sure this is right. For example they do a “school ties only” crunching. The Ferrara/Sawyer connection is excluded if one is looking at school ties only, but the paper uses another Gabelli example further along, which would be included.  Mario J. Gabelli himself, the founder of GAMCO, graduated from Columbia Business School in 1966, making him a CBS classmate of Ronald H. McGlynn, one of the founders of Cramer Rosenthal McGlynn LLC.

This tie may have been important in the “2007 activism event launched by GAMCO Investors” with regard to the disappearance of Aquila Inc., the electricity and natural gas concern.

Elite or Non-Elite Schools

Then they exclude elite school ties, on the theory that elite education may be a proxy for trading or fund-managing ability, and that may throw off the numbers. Still, non-elite school ties “significantly predict institutional trading.”

These ties are casually significant, that is, they cannot be explained by alternative hypotheses such as similarity in fund characteristics or strategies,

Such ties benefit both the connected institution clambering onto the bandwagon and the activist fund driving the wagon.

Again, none of this seems to fall outside of one’s intuitive expectations, but it is good to have those expectations confirmed with robust statistics.


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