Thursday , November 7 2024
Home / Mike Norman Economics / Shin Jang-Sup – How Hedge Fund Activists Prey on Companies

Shin Jang-Sup – How Hedge Fund Activists Prey on Companies

Summary:
When corporate raiders coopted “shareholder democracy” for their own ends. I remember reading how a private equity company bought into Sainsbury's shares and tried to convince the other share holders that by getting Sainsbury's to sell all its property and then lease it back again they would make massive bonanza, and then the private equity fund would have walked off with an enormous bundle for little outlay. This could have left Sainsbury's far less competitive in the future but Sainsbury's management, fortunately, managed to foil the plan. Shin Jang-Sup talks about how share holder democracy was increased through legislation but this gave some private equity companies and hedge funds a way of getting more control over companies which was unwarranted by the amount of shares they

Topics:
Mike Norman considers the following as important:

This could be interesting, too:

Mike Norman writes On Sraffa and Keynes — Lars P. Syll

Michael Hudson writes US Election: The Illusion of Choice

Lars Pålsson Syll writes What pulls me through in this world of troubles

Mike Norman writes Escobar: The Roadblocks Ahead For The Sovereign Harmonious Multi-Nodal World — Pepe Escobar

When corporate raiders coopted “shareholder democracy” for their own ends.

I remember reading how a private equity company bought into Sainsbury's shares and tried to convince the other share holders that by getting Sainsbury's to sell all its property and then lease it back again they would make massive bonanza, and then the private equity fund would have walked off with an enormous bundle for little outlay. This could have left Sainsbury's far less competitive in the future but Sainsbury's management, fortunately, managed to foil the plan.

Shin Jang-Sup talks about how share holder democracy was increased through legislation but this gave some private equity companies and hedge funds a way of getting more control over companies which was unwarranted by the amount of shares they owned, after which they were able to force CEO's to do things like buy back their companies shares rather than invest, or even break up their companies so they could be asset stripped. This predatory capitalism is cannibalizing itself slowly bringing Western civilization down, ruining companies, and causing more unemployment.

ICI was one off the world's leading chemical engineering companies until a private equity company broke it up and asset stripped it.  KV

The casual observer can hardly comprehend the value-extracting power of hedge fund activists. Technically, they are no more than minority shareholders. Yet they exert enormous influence, often forcing these companies to undertake fundamental restructuring and to increase stock buybacks and dividends substantially. For instance, Third Point Management and Trian Fund Management, holding only 2% of the outstanding stock of Dow Chemical and DuPont, respectively, engineered a merger-and-split of America’s top two chemical giants at the end of 2015 that resulted in both massive layoffs and the closure of DuPont’s central research lab, one of the first industrial science labs in the United States.
So how did hedge fund activists gain power so far in excess of their actual shareholdings?
In the 1980s, predatory value extraction was the province of the corporate raiders who flexed their muscles by becoming major shareholders of target companies and staging hostile takeovers. This mode of value extraction was highly risky in two respects. First, the raiders needed to raise substantial amounts of money to purchase enough shares that they could plausibly threaten to take control of the companies they targeted. Second, they frequently faced legal battles with management or incumbent shareholders because nothing less than control of the company was at stake. Being able to influence corporations without taking those risks would be a corporate raider’s dream come true.
In the late 1980s and 1990s this dream became a reality. Driven by a clamor for “shareholder democracy” amid a rapid increase in institutional shareholding of public corporations and broadening acceptance of the maximizing shareholder value (MSV) view, the federal government implemented regulatory changes that set the stage for hedge fund activism.

Economics




Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

Leave a Reply

Your email address will not be published. Required fields are marked *