Morgan Joseph

Proactive stance needed as activist hedge funds achieve surprising success without acquiring control, says Morgan Joseph report. Firm launches shareholder activist investment banking group as new class of investors grows. Web conference scheduled to discuss study and framework for addressing activism
7/31/06

NEW YORK, NY – Activist hedge funds have had “surprising success” with their proposals against targeted companies, with more than 35% of campaigns resulting in their winning board representatives, according to a study released today by investment bank Morgan Joseph & Co. Inc.’s newly formed Shareholder Activist Group.

The group authored a report, “Management in an Era of Shareholder Activism,” that warns that the emergence of a new class of activist investors will force management to be more mindful of their potential vulnerability. The report urges all companies to undergo a vigilant review of strategic, financial and operational initiatives to improve shareholder value.

In the study, Morgan Joseph examined 94 campaigns waged publicly by 29 hedge funds. As a group, the 29 activist hedge funds ranged in size from less than $100 million to nearly $10 billion under management, with average equity capital of $1.9 billion.

“We undertook the study because activism has the potential to affect the course of hundreds of companies over the next several years,” said S. Randy Lampert, managing director in Morgan Joseph’s corporate finance department and co-head of the firm's Shareholder Activist Group. “However, while today’s activists share the same DNA as corporate raiders from the 1980s, their approach differs in that they attempt to force changes without buying the company outright.”

“Activist investors target companies whose stocks, in their opinion, are underperforming,” commented Andrew Shiftan, managing director and co-head of the Shareholder Activist Group. “Their goal is to influence management and the board of directors to adopt the proposals that they believe will produce a rapid stock price improvement. However, their weapon of choice is not the unsolicited tender offer, but the purchase of an influential block of stock that serves as the rallying point for proposals to effect change.”

“On the other hand,” Mr. Lampert adds, “companies are not without the means to thwart unwanted activist attention. While a healthy stock price is the ultimate defense, a proactive stance and prompt response to activist approaches can also be highly effective.”

What Activists Want
“As activist funds continue to enjoy success and healthy profits compared to other hedge fund investment strategies, their ranks will expand,” the report states. Morgan Joseph predicts that this will give rise to even more activist campaigns targeting a greater number of corporations.

The report concluded that activist demands tend to be concentrated around the following initiatives:

• Changing the capital structure
• Altering a company’s M&A decisions, forcing a sale of all or part of the company
• Replacing management or modifying a board’s composition, often to include the fund’s nominees
• Returning cash to shareholders through either a dividend or a stock repurchase program

What Management Can Do
As for management’s alternatives, Mr. Lampert says that in the absence of a high stock price, “management’s most effective strategy is to take proactive steps before an activist hedge fund arrives; these actions can be broadly divided into a review of strategic, financial and operational options to improve the business.”

However, according to Mr. Shiftan, taking the initiatives is not enough—the initiatives must be accompanied by a well planned and implemented communications program.

To assist corporations in maximizing shareholder value and maintaining company stability in an era of heightened activism, Morgan Joseph will be hosting a web conference to discuss the following topics:

• The driving forces behind the resurgence of shareholder activism;
• Findings from their research tracking 94 campaigns during the past two years;
• A framework and tool set for addressing activists in the shareholder base.

In response, Morgan Joseph has formed a Shareholder Activist Group, one of the first on Wall Street, comprising a team of dedicated professionals with expertise in both debt and equity capital markets, mergers and acquisitions and corporate restructurings.

Conference Call Information

Morgan Joseph will host a conference call for corporate managements on Wednesday, August 16, 2006, from 2:00 p.m. to 3:00 p.m. EST to discuss the results of its study, and specifically address the issues driving growth in shareholder activism, what companies can expect in typical activist campaigns, and strategies and tactics for dealing with them. To register, visit https://morganjoseph.webex.com