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Activist hedge funds under attack

Date: Friday, September 29, 2006
Author: Neil Stewart, irmagazine.com

A kinder, gentler activist takes on the IR Magazine Canada Think Tank in Toronto

TORONTO -- In a week when hedge funds have been under attack, Rob Kittel was brave to take part in IR magazine's Canada Think Tank yesterday. Around 50 investor relations professionals, including many who have grappled with aggressive hedge funds in the past, had the opportunity to grill Kittel, a partner in Goodwood, one of Canada's leading activist hedge funds.

Yet Kittel escaped the TSX Broadcast Centre in Toronto with his skin intact and the respect of most everyone. 'I wish we had more Goodwoods,' said one IRO.

The same day that Pirate Capital was announcing it was losing half its staff amidst an SEC investigation and miserable returns for the year, Kittel distanced Goodwood from the cutthroat tactics wielded by other activist funds. Only about one in ten Goodwood campaigns reach the headlines, he said. The rest play out in cordial letters, phone conversations and meetings with CEOs and directors.

On the other hand, very much like Pirate, Goodwood has seen less than a 6 percent return so far this year, down from annual returns of nearly 25 percent a year. Are cracks showing in the activist strategy? Kittel said no, and insisted there is a lot of value still to be unlocked through targeting underperforming companies. He also warned management not to return to staggered boards and poison pills to entrench themselves. 'That's just not consistent with good corporate governance,' he said.

ISS Canada president Bill Mackenzie, who was on a panel with Kittel, had this to say to hedge fund activists on behalf of the wider investment community, from pension funds to retail investors: 'Thanks.' He pointed out that activists just want to increase returns to shareholders, and a short-term bump in valuation doesn't automatically equal a long-term hit.

Among other topics at yesterday's Think Tank was the impact of Bill 198 on IR. Canada's civil liability for continuous disclosure, in effect since the beginning of the year, didn't change disclosure rules; it just added the threat of shareholder lawsuits, which up until now could only be leveled at stock offerings.

Many IROs confirmed a disclosure 'chill' in response to Bill 198 and told tales of nervous boards pulling back from offering earnings guidance. But in doing so, directors are shifting risk to IROs and other spokespeople, pointed out one IRO. Without some kind of publicly disclosed guidance, she wondered, 'What can we talk about with investors?'

by Neil Stewart