"If the strategy is to suggest a stock buyback, that is clearly not going to happen at the moment. Simply suggesting the company buy back stock or similarly looking to a financial buyer or a private equity shop as an exit strategy is now off the table," says Barry Cronin, of Taylor Advisors, a fund of hedge funds that at times invests with activist hedge funds.
"In a bull market it is easy to demonstrate that a company is underperforming its peers by 25%. In a bear market, if peers are down 50% and a firm is down 55%, thats a tougher story to sell"
Julien Balkany, Nanes Balkany Partners
On the other hand, points out Balkany, in a bull market it is harder to convince shareholders that a turnaround of a firm is needed. "These days, a lot of large shareholders are frustrated. After the investment banking scandals, shareholders and investors are looking more closely at what is going on in a boardroom and how directors are fulfilling their fiduciary duties. Executives are also looking to get out, and fewer companies seem prepared to fight shareholder demands, so activism might be more common. That said, a lot of institutional shareholders have more concerns right now than joining in proxy battles."
Cronin agrees that, at present, hostile activist strategies that "throw stones at management or shake trees" do not make sense. Now more than ever it is important that the activists can work with management to unlock value, including cost-cutting measurements. "Some activists are seeing better value in the debt markets and are shying away from buying equity in a company."
Nanes Balkany has implemented a slightly different activist strategy that has returned more than 20% net of fees since its inception in January 2008. Its founders are former investment banking advisers to oil and gas companies. The fund predominantly targets oil and gas exploration and production companies that are listed in the US, Canada and Europe but carry out business worldwide. "We look for special situations where we have identified a predetermined path to turn around the targeted company," says Balkany. "It includes among other proactive steps, divesting non-core assets, relisting the company on another exchange where shareholder interest would be far greater, substantially reducing the administrative costs by cutting down the staff and consolidating the various offices."
Understanding a sector or company is more important than ever in a bear market if activists wish to truly unlock value. Operational expertise in particular is necessary for financial re-engineering. "Not everyone is equipped to do that," says Cronin. "The next big wave will be the re-engineering of distressed companies."