Activist Hedge Funds: Wolf Pack Activism
Duke University – Fuqua School of Business
London School of Economics (LSE); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Maryland – Department of Finance
It is alleged that activist hedge funds congregate around a common target, with one acting as the “lead” activist and others as peripheral activists, or “wolf pack” members. We model this phenomenon as a coordination game, and show that the concentration of capital and skill matters: Holding constant total activist ownership, the presence of a lead activist increases the probability of successful activism due to improved coordination among activists. We model the dynamics of share acquisition by wolf pack members and the lead activist: Block acquisition by the lead activist spurs significant entry by wolf pack members, while the lead activist acquires only if the expected wolf pack is large enough. Finally, we provide predictions concerning which wolf pack activists will buy ahead of the lead activist, and which will wait to acquire until after the lead activist’s stake is announced.
Activist Hedge Funds: Wolf Pack Activism – Introduction
Activist hedge funds have been the most prominent and successful proponents of institutional shareholder activism in recent decades (Gillan and Starks 2007). They have
delivered significant shareholder value both in the short-term (Brav, Jiang, Partnoy, and Thomas, 2008) and in the long-term (Bebchuk, Brav, and Jiang, 2013). Yet, the
transformative effect of these activist hedge funds is typically achieved via relatively small holdings: According to Brav, Jiang, and Kim (2010) the median stake of activist hedge funds at the beginnings of an activist campaign is only 6.3%. How do relatively small blockholders have such transformational influence? One possibility is that hedge funds (and other activist shareholders) act in groups: Multiple funds implicitly coordinate together to achieve change in a target firm, thus radically enhancing the power of the lead activist who files the 13D.
Such group activism has already been alleged by market observers, who note that multiple hedge funds or other activist investors sometimes congregate around a common target, with one acting as the ‘lead’ activist and others as peripheral activists, or “wolf pack” members (see, e.g., Briggs (2006)). Since U.S. disclosure rules (Regulation 13D) require investors to file together as a group when their activities are formally coordinated, much of this activity is ostensibly uncoordinated. For example, Briggs (2006) quotes one target manager as saying that “This form of parallel action, driven by numerous independent decisions by like-minded investors, as opposed to explicit cooperation agreements among participants, has allowed hedge funds to avoid being treated as a ‘group’ for purposes of Regulation 13D.” In such situations, peripheral funds may trade before an activism campaign has been announced, by predicting which firms will be targeted, or they may wait until after an initial 13D announcement. In either case, these funds often join together with the lead activist to form a larger voting block and ultimately place greater pressure on target management. Companies have responded to such tactics by, for example, changing the provisions of their shareholder rights plans, or “poison pills,” or by pursuing legal action when they believe investors are, in effect acting as a group and thereby violating disclosure rules. Nathan (2009) writes:
This could be a particularly important issue for public companies because the wolf pack tactic…has been used virtually exclusively by the activist investor community in campaigns against corporations, often culminating in successful proxy contests or other change-of-control events as documented in the CSX case. The market’s knowledge of the formation of a wolf pack (either through word of mouth or public announcement of a destabilization campaign by the lead wolf pack member) often leads to additional activist funds entering the fray against the target corporation, resulting in a rapid (and often outcome determinative) change in composition of the target’s shareholder base seemingly overnight.
Similarly, Smilan, Becker and Holbrook (2006) note that “even large and well-known public companies are vulnerable to attacks by these wolf packs.” They suggest that companies aggressively pursue prosecution of groups of activists that may have violated the group reporting provisions.
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