John Gapper: Hedge fund agitators merit hearing
They held the inaugural Value Investing Congress, a gathering of antsy hedge fund managers, at the Time Warner Centre in New York this week. It was a nice choice of venue.
As Bill Ackman of Pershing Square Capital was on stage outlining his plan to push McDonald's into taking on $9bn (￡5.2bn, �7.7bn) of new debt and selling most of its company-owned restaurants, Time Warner's bosses were at work 30 floors above. Carl Icahn, their own hedge fund irritant, has pressured them into increasing a $5bn share buyback to $12.5bn and still wants them to sell its cable division.
The congress was billed, with a dollop of hyperbole, as the biggest gathering of value investors outside the annual meeting of shareholders in Berkshire Hathaway. Mr Ackman is no Warren Buffett. He does not have $43bn to spare (Berkshire Hathaway's cash pile happens exactly to match McDonald's stock market value) and had to amass his 5 per cent stake in McDonald's mostly in options.
Mr Ackman also wants a quicker turn than the indefinite holding period Mr Buffett espouses. Still, he and his fellow agitators are doing some good for themselves and for other investors. They are forcing managers who want to sit on assets to justify themselves. They may not be the Sage of Omaha but a lot of what they say makes sense.
Companies have made themselves vulnerable to activist hedge funds by playing safe in the past three years. After the scare of the collapses of Enron and WorldCom, they paid down debt and amassed cash in case they suffered a similar crisis. Now, according to Standard & Poor's, US companies hold $1,300bn of cash and liquid assets
