The financial markets are more closely related than most people understand. Although the “economic pie” continues to grow each year (except during occasional recessions), the global economic system is essentially a closed system where a change in attitude or rules regarding one financial market has a significant impact on another. Case in point: the recent increase in shareholder activism by billionaire hedge fund managers like Icahn and Ackman is directly responsible for increasing the risk of corporate bonds.
Moody’s makes the case
Credit rating agency Moody’s published a report this week arguing that shareholder activism is leading to increased corporate bond risk. They say it boils down to activists forcing companies to spend cash they should be saving to pay bondholders
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Corporate bondholders could see “a rising tide of credit-negative events” over the next few quarters, Moody’s told clients in the report, pointing to a continuing increase in the number of activist campaigns against companies.
According to Moody’s analyst Chris Plath, “There are more and more cases each year, and larger companies being targeted, and company boards and managements do not want to end up on the front page of the Financial Times for coming under attack from an activist.”
The report also pointed out that there were 220 shareholder activist campaigns in North America in 2013, up from 209 in 2012 and a mere 179 in 2011. The report also highlights how the shareholder activist sector has become one of the largest sectors in the hedge fund industry.
Icahn versus eBay
Hedge fund activist king Carl Icahn has has his sights set on online auction giant eBay Inc (NASDAQ:EBAY) for some months now. Icahn claims that eBay is “one of the worst managed companies I have ever seen.” He also argues that several of eBay’s directors have conflicts of interest and that eBay CEO Mr. John Donahoe is incompetent or collusive. Icahn in specific has called out eBay Inc (NASDAQ:EBAY) directors Marc Andreessen and Scott Cook as conflicted and points to the sale of Skype to Microsoft in 2010 as evidence. Icahn claims that eBay management incompetence or conflict cost the company $4 billion in that transaction alone.