Friday, July 27, 2007

Information Arbitrage: A New Kind of Shareholder Activist - The Internet-Empowered Retail Investor

From Roger Ehrenberg's Information Arbitrage blog earlier this month:

I understand the power of the Internet: much of my work and personal investing depends on it. But I hadn't put two and two together as to how this power could be harnessed in an investment context until reading a recent Wall Street Journal article titled A New Thorn in Motorola's Side.
The thorn: an investor holding a mere 130 shares - around $2400 worth - of MOT stock. We're not talking Fidelity here, people, or Carl Icahn, either. Check this out:

Jackson on Monday afternoon launched an online campaign called “A ‘Plan B’ for Motorola,” urging the replacement of Ed Zander as CEO and chairman immediately — as well as four of 10 other board members, among other initiatives. He also posted videos on YouTube and put up a Web page where shareholders can “pledge” their shares to support his plan.

Ok, ok. Anybody can do this - no big deal right? Well, Mr. Jackson has shaken the trees before and gotten some pretty impressive results:

It would be easy to ignore Jackson, if he hadn’t helped balloon an investor revolt at Yahoo ahead of last month’s resignation of former CEO Terry Semel. Jackson owned just 96 Yahoo shares, but his barrage of blog posts and online videos quickly got him attention. He launched the campaign in January, agitating for the ouster Semel and some board members. About 100 Yahoo shareholders pledged roughly two million shares on to support him (representing about 0.2% of Yahoo outstanding shares).

I know 2 million YHOO shares isn't exactly going to force a sea change in company policy or lead to a reconstitution of the Board, but it is not a trifling matter, either. A person speaking with 2 million shares (or approximately $54 million) of stock behind them has a voice, and if this grass-roots approach becomes an accepted method by which the retail investor is heard, look out.

Jackson is among a new breed of investors who are savvy about the grass-roots power of the Internet and use it to make activism no longer a game reserved only for wealthy financiers. The goal of his Motorola campaign is to find a solution “which will deliver extraordinary value to Motorola shareholders” and “put Motorola on a path back to its rightful place as the worldwide leader in communications,” he writes in the proposal.

Now I'm not trying to make a mountain out of a molehill, but the Internet is a place where viral ideas can spread - and spread quickly. And as virtual communities become increasingly de rigeur and people are able to efficiently leverage their own networks, it is not hard to see scenario where a meaningful number of shares could be pledged to back a spokesperson championing the cause of the retail investor. The IR outreach stakes have just been raised; it isn't just golf with Fidelity, Janus, Wellington and Capital Research any more. You've now got those pesky, Internet-savvy retail investors to deal with as well. And they want answers, accountability and results. NOW.

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