Hedge Funds' Activism: A New Trend of Convergence toward Private Equity in Public Firms?

Abstract

In this paper, our objective is to review the existing theoretical and empirical literature on activist policies by hedge funds' and to empirically verify - by means of a clinical case study - if hedge funds' activism creates value not only for the activist but for all the shareholders of the firm. After a quick overview of the size of hedge funds and private equity markets, we introduce the evolution of hedge funds' investment strategies in the past few years, pointing out the increased similarities between hedge funds' and private equity investors' approaches to shareholders' activism. Section 3 presents an analysis of hedge funds' approach to activism and highlights the most evident characteristics of the firms that are likely to be targeted by activist hedge funds. Section 4 deals with the strategies that hedge funds implement in order to start a fight against incumbent management and present an in-depth analysis of empty voting and hidden ownership. Finally, Section 5 introduces the clinical case study of the fight between Carl Ichan and Time Warner Inc. during the period going from August 2005 to March 2006. The case, carried out by implementing an event study methodology for various relevant steps of the struggle between the hedge fund and Time Warner's CEO, is particularly interesting since it helps us demonstrate that the market looked favorably at Icahn's activism and instead heavily punished Time Warner stock performance once Ichan gave up the fight. In a sense, it is an indirect confirmation that hedge funds' activism matters in influencing shareholders' value. Section 6 concludes by summarizing pros and cons coming from hedge funds' activism.