Shareholder activism has been on the rise over the past ten years, with activist hedge funds’ assets under management exceeding the $100 billion level. Most modern activist investors do not resemble the much-feared “corporate raiders” of the 1980s, as they tend to focus on their targets’ long-term performance instead. Meanwhile, statistics reveal that activist targets tend to beat broader market benchmarks on aggregate, but there will always be skeptics and activists should prove them wrong. Nonetheless, individual investors who doubt the benefits of shareholder activism and its outperformance in particular can follow activists’ moves as part of their broader stock analysis process instead. For that reason, this article will discuss two 13D filings submitted by several hedge funds monitored by Insider Monkey.
Following activist funds is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Starboard can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds have been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 38 months since our small-cap strategy was launched it has returned over 102% and beaten the S&P 500 ETF (SPY) by more than 53 percentage points (read more details). Soon, we’ll be releasing a new quarterly newsletter written by former activist hedge fund analyst Michael Bland that tracks ten or so activist campaigns at any given time.
As stated by a Schedule 13D filing, Farallon Capital Management, a fund founded by Thomas Steyer, owns nearly 3.57 million shares in SolarWinds Inc. (NYSE:SWI), accounting for 4.96% of the company’s outstanding common stock. This compares with the 2.44 million-share stake held on September 30, as revealed by Farallon’s 13F filing for the third quarter. Farallon Capital exceeded 5.0% beneficial ownership of common stock in SolarWinds on December 11, but ceased to be a beneficial owner of more than 5% of shares in the company due to subsequent sales. At the same time, The fund has not conducted any discussions with the company’s officers, directors or other related individuals and has no plans or proposals to the company’s management. In mid-October, the developer of information technology (IT) management software announced that it had agreed to be acquired by private equity technology investment firms Silver Lake Partners and Thoma Bravo LLC for $4.5 billion in cash. As a result, each shareholder of SolarWinds Inc. (NYSE:SWI) is set to receive $60.10 per share, which is at least 53% higher than the company’s share price at the end of September. The discrepancy of slightly more than 3% between the current share price of SolarWinds and the deal price reflects the risk associated with a potential failure of the deal, so one could make a bet on the successful completion of this acquisition. The deal is anticipated to be completed during the first quarter of 2016.
The number of hedge funds from our database with positions in the company dropped to 23 from 27 during the September quarter. Similarly, the overall value of these positions shrank to $403.60 million from $469.64 million during the three-month period. Hedge funds tracked by Insider Monkey stockpiled 13.40% of the company’s outstanding common stock, while Glenn J. Krevlin’s Glenhill Advisors upped its position in SolarWinds Inc. (NYSE:SWI) by 4% during the third quarter to 1.06 million shares.
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Let’s head to the second page of this article, which discusses a 13D filing submitted by activist investor Carl Icahn.
The bidding war between Carl Icahn and Japanese tire maker Bridgestone for Pep Boys-Manny Moe and Jack (NYSE:PBY) is not completed just yet. On December 18, Icahn Enterprises proposed to acquire all the remaining shares of the struggling automotive aftermarket service and retail chain for $16.50 per share in cash, a transaction that would not be “subject to any due diligence, financing or antitrust conditions”. The recently-filled 13D by Carl Icahn and other public announcements revealed that the deal will take place unless Bridgestone “agrees to a transaction prior to 8:00 p.m., New York City time, on December 23, 2015 that is superior to the transaction” proposed by Icahn. Let us remind you Pep Boys-Manny Moe and Jack (NYSE:PBY) announced a merger deal in October, under which a subsidiary of Bridgestone was set to acquire all outstanding shares of the company for $15.00 per share in cash (Bridgestone commenced a tender offer on November 16 at $15.00 a share). Icahn Enterprises, which believes that the acquisition of Pep Buys “presents an excellent synergistic acquisition opportunity of Auto Plus”, proposed $15.50 per share on December 7 and Bridgestone raised its tender offer to $15.50 as well. Shares of Pep Boys are trading above the offer proposed by Carl Icahn, so market participants anticipate that the bidding war between the two parties is likely to continue.
A total of 18 hedge funds tracked by Insider Monkey were invested in Pep Boys at the end of the third quarter, up from 16 a quarter earlier. By the same token, the value of their investments climbed to $147.24 million from $119.33 million during the quarter. It should be mentioned that the hedge funds monitored by our team accumulated 22.40% of the company’s outstanding common stock. Steven Boyd’s Armistice Capital acquired a new stake of 840,000 shares in Pep Boys-Manny Moe and Jack (NYSE:PBY) during the third quarter.
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