Hedge Fund CEO Says Canadian Firms Could Become Takeover Targets

Date: Wednesday, September 17, 2008
Author: Economic News.ca

One of the world's largest hedge fund players warned a Bay Street audience Tuesday that Canadian companies must work to "close the value gap" for their shareholders or risk becoming takeover targets by activist shareholders during the current credit crisis.

"Know your shareholders," said Eric Rosenfeld, president and CEO of New York-based hedge fund giant Crescendo Partners LLP.

Rosenfeld told the audience at a Toronto CFA Society gathering that finding ways to unlock value for shareholders should be the top priority as many share prices fall during the credit shakedown. He said this means making sure not to alienate shareholders either.

"If they don't like the communication or the strategy, they're going to move on to other things," he said.

Crescendo Partners runs hedge funds and is known for espousing shareholder activism. Such activism usually involves a group of shareholders increasing their stake in a public company's stock in order to rally for changes ranging from a takeover of the firm to the adoption of "greener" environmental management practices.

Crescendo has been involved in the takeover or turnaround of Canadian companies such as DALSA, Spar Aerospace and Cott.

Rosenfeld said Canadian companies have several strategies they can use to fend off pressure from shareholder activist groups like Crescendo. They include instituting dividends, replacing bad management, buying back shares, or even considering taking a firm private again if it no longer seems to be working as a public company.

Rosenfeld acknowledged that falling share prices sparked by the U.S. credit crunch are creating more takeover or investment opportunities for activist players like Crescendo.

"There are an awful lot of opportunities out there. There's a 15 or 20% off sale" on company market cap valuations, he said.

Crescendo typically buys a 5-20% stake in a company's total shares, then increases its power in the firm by getting its own people appointed to the board of directors, leading to the removal of existing management, or even pursuing proxy battles that can put poison pill rules into play (such rules are designed to help public companies fend off hostile takeover bids).

Rosenfeld said Canada is a much more attractive environment for activist investment houses like his because rules regarding poison pills and the disclosure of total ownership stake in public companies are less onerous here than in the U.S. That means groups that own just 5% of a public company's shares can push for more say in the firm's direction if they feel bad management or other problems are pushing the stock price down.

"The rules [in Canada] are a lot better for activists," Rosenfeld said. "There's much more of a sense of democracy in the markets in Canada."

The Wall Street veteran said activist shareholder groups have more sway with public companies today than in the past, especially since new regulatory regimes, like Sarbanes-Oxley, have come into effect to keep fraud in check and give more protection to investors.

"The view back then was 'If you don't like it, sell the stock,'" Rosenfeld recalled of the pre-Enron past.

He ended his remarks with a tone of optimism, encouraging nervous executives to keep their hopes up amidst market turmoil.

"It also felt like the end of the world 10 years ago or in 2001. But two years from now things will probably be better."

By Christine Wong, cwong@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca