CNBC Video: How do Activist Investors Help Companies?

My CNBC appearance from earlier this afternoon discussing activist investors and Yahoo!



[Long YHOO]

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Latest Ideas From Some Heavy Hitters

By Eric Jackson
RealMoney Contributor
5/27/2010 5:00 PM EDT
Click here for more stories by Eric Jackson

Yesterday was the 15th annual Ira Sohn Research Conference in New York. The event brings together the best hedge-fund managers in the world to present their top ideas for the coming year. All proceeds from the event go to charity, supporting pediatric cancer and other childhood diseases.

The event has a stellar reputation, partly because of its track record of managers presenting ideas here for the first time publicly that go on to pan out exactly as they argue. In 2008, David Einhorn made a splash at this conference by pointing out some of the problems with Lehman Brothers -- four months prior to that firm's bankruptcy. At the 2007 conference, Bill Ackman called for the demise of Ambac (ABK - commentary - Trade Now) and MBIA (MBI - commentary - Trade Now), and last year he touted General Growth Properties (GGP - commentary - Trade Now) when the stock was under $4 -- it's now over $13. Some have called this conference the Learning Annex for hedge-fund managers.

Just an idea for the event organizers: There's such interest in the ideas from the event that they should consider live streaming the event on the Web. They could charge for it and likely still get a large audience that would further support their worthy cause.

Yesterday's roster of speakers was stellar as usual, including Ackman of Pershing Square, Einhorn from Greenlight, Sam Zell, David Tepper of Appaloosa and Seth Klarman of Baupost.

Many speakers, including Einhorn and Ackman, reiterated arguments they've made publicly, for example shorting the ratings agencies likeMoody's (MCO - commentary - Trade Now) andMcGraw-Hill (MHP - commentary - Trade Now) and going long General Growth. Other speakers, such as Niall Ferguson of Harvard and former auto-czar Steve Rattner, chose to stick to macroeconomic predictions.

David Tepper, who was bullish in 2008 and lost money, then stayed bullish in 2009 and made $4 billion, was still bullish yesterday. He pointed to the bleachers, a la Babe Ruth, and said that Bank of America (BAC -commentary - Trade Now) is going to $27. Tepper also likes AIG (AIG - commentary - Trade Now) and the beaten-down Spanish bank Banco Santander (STD - commentary - Trade Now).

....

[This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required.]

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Does Icahn Still Make Them Tremble?

Carl C. Icahn likes to be called an activist investor, not a raider. He has, however, just made a hostile bid for one company, and is in multiple court battles.

By JULIE CRESWELL

Published: March 21, 2010
The New York Times

HE is a billionaire several times over. He has spent the better part of four decades terrorizing corporate chiefs and battling entrenched boards. His name is emblazoned on a stadium on an island in the East River, a laboratory at Princeton, a science center at the Choate Rosemary Hall school in Connecticut and charter schools in the Bronx.

Yet, for all of his high-profile successes, Carl C. Icahn says he feels misunderstood.

"There's a misperception out there that we bust up companies. Or that I believe that all people on boards are bad," growls Mr. Icahn, the 74-year-old investor, as he sets a coffee cup on a small mahogany table in his office on the 47th floor of a Midtown Manhattan tower. "It's just that, in some cases, the C.E.O.'s are so wrong," he grumbles, then quickly flashes a big smile and laughs at his own joke.

While Mr. Icahn likes to pull out his Rodney Dangerfield-esque why-can't-I-get-any-respect? routine, he has over the years perfected the art of stirring up trouble for companies and making money - sometimes lots of it - for his investors and himself.

And while many of his peers from back in the day - names including T. Boone Pickens, Saul P. Steinberg, Robert M. Bass - keep significantly lower profiles these days, Mr. Icahn has not gone quietly into the night.

"He is a survivor," said Chris Young, a director at Institutional Shareholder Services, a Rockville, Md., proxy advisory firm. "If you look at the proxy pipeline, he's involved with a bunch of contentious situations."

On Friday, Mr. Icahn made a hostile offer to buy the Hollywood studio Lionsgate Entertainment; meanwhile, through the $8 billion hedge fund and other assets he oversees - $6 billion is his money - he is waging proxy fights to get new or additional board seats at the biotech companies Biogen Idec and Genzyme.

They are also warring with Donald Trump and debt holders in a New Jersey bankruptcy court over ownership of three casinos in Atlantic City that bear Mr. Trump's name.

In recent months, Mr. Icahn has bought a partly built casino on the Las Vegas strip and the Tropicana Casino and Resort in Atlantic City from bankruptcy.

It is too early to tell whether he will prevail in these battles. But after all these years, a career of victories and occasional misses, one thing can certainly be said of Mr. Icahn: He is one of Wall Street's most colorful, controversial and complicated characters.

Wearing slightly rumpled khakis and waving his eyeglasses to punctuate key points, Mr. Icahn is constantly jumping from one topic to another in an endless stream of dialogue. In that respect, he more closely resembles an absent-minded professor than a master of the universe. Corporate executives visiting his offices walk through hallways adorned with paintings of battle scenes and sculptures of cowboys on bucking broncos. One large painting in the conference room features a lion gazing at the bones of an animal in a desert.Yet he bristles at being labeled a "raider," despite the fact that he is widely viewed as a founding member of the clan that roamed Wall Street in the 1980s, occasionally pursuing hostile takeovers with ruthless abandon.

He prefers to paint his role in those years with the same "activist investor" brush he holds today, arguing that he has created tens of billions of dollars of value for shareholders in companies in which he invested. (In conversations, he declares that he has created $30 billion, $40 billion and even $50 billion worth of value for shareholders. What is a few billion among friends?)

Last year, his hedge fund, highly concentrated in a handful of stocks and bonds, soared 32 percent, after fees, according to a letter sent to investors. That's a reversal from 2008, when it fell 36 percent, including fees. Mr. Icahn's firm declined to provide an after-fees figure.

To some people, Mr. Icahn and activist investors of his ilk are the heroes of the financial system. "They are the ones who are holding corporate America's feet to the fire and incentivizing companies to perform better," said Frank Partnoy, a professor of law and finance at the University of San Diego. Mr. Partnoy contributed to a study that examined activist investing from 2001 to 2006 and found that activists held stocks longer than others and that the companies they pursue often outperform the market. But some fellow activists contend that Mr. Icahn's strong-armed methods of arguing to get on a board and then pushing for a quick change - such as paying a dividend, buying back stock, merging with another company or cleaving off an underperforming unit - are sadly out of date in today's corporate boardrooms. "There are times when you push back and be harsh and times when you roll up your sleeves and work with management, getting more involved with operations," said Eric Jackson, an activist investor in Naples, Fla. "Carl's record on that score hasn't been as successful."

Mr. Icahn and his defenders say he has improved several companies he has invested in or owns. (Besides the hedge fund, he oversees Icahn Enterprises, a hodgepodge of companies he has collected over the years in the automotive, metals and real estate industries.) Late one recent Friday afternoon, Mr. Icahn, a workaholic night owl who rarely appears at glittering high-society functions, dismissed thoughts about going out to dinner with his wife, Gail, or - gasp - taking a bigger break from the business altogether. "What else am I going to do?" Mr. Icahn asked before returning to his office for a meeting on his real estate holdings. "Play shuffleboard?"

IN the spring of 2008, Roy J. Bostock, the chairman of Yahoo, and his fellow directors were coming under a barrage of criticism from investors after Microsoft abruptly broke off merger talks. Mr. Icahn, who had a large stake in Yahoo, jumped into the fray. In a scathing letter to Mr. Bostock, he said the board had "acted irrationally" and "completely botched" the merger. Mr. Icahn's solution included putting up a slate of 10 directors picked by him. (The company eventually settled, placing Mr. Icahn and two of his other nominees on the 11-member board.) What Mr. Icahn did or did not accomplish in his 15 months on the Yahoo board - he stepped down last fall - is the subject of hot debate. But what's surprising about that debate is that one of Mr. Icahn's biggest detractors is Mr. Jackson, a fellow activist investor. And his biggest supporters are some other Yahoo directors.

"I think in the first couple of meetings, there was a lot of trepidation: Will he just be disruptive and not constructive? Can this work?" said Maggie Wilderotter, the C.E.O. of Frontier Communications, who resigned from Yahoo's board last year. "Carl doesn't worry about what people around the table think about him. He's blunt. If there's an elephant in the room, he puts it on the center of the table." And while Mr. Bostock recalled with humor at least one conversation with Mr. Icahn that involved many "four-letter words going back and forth," he said he appreciated Mr. Icahn's persistence and the different point of view he brought to discussions.

"Carl brought financial acumen to the board and a good, solid understanding of the strategic imperatives that faced the company, particularly what it would take to compete longer term with the likes of Google, Microsoft and others from a capital-expenditures point of view," Mr. Bostock said. "It was one of the reasons he was pushing for a Microsoft deal."

But Mr. Jackson, who manages a small activist hedge fund called Ironfire Capital, says Mr. Icahn blew it with Yahoo.

"There was a sense that shareholders were going to go to Sunnyvale with pitchforks," Mr. Jackson said, referring to Yahoo's California base. "He saw that and thought he could ride in on a horse and take control of the company. He didn't realize that he had to articulate to investors what it was he was going to do if he actually had the keys to the car and was driving things." "He's the granddaddy of activist investing. Anyone who practices activist investing has to pay homage to him and the trail that he's blazed," Mr. Jackson added. But "I would say his involvement with the company did nothing for shareholders and hurt his own investors in the stock."

Mr. Icahn said that while his firm did not make money in Yahoo, it was supportive in bringing on board Carol Bartz, the company's C.E.O., and instrumental in eventually forging an Internet search and advertising partnership with Microsoft. As for the criticism from Mr. Jackson that his methods do not work, Mr. Icahn said, "To say that we don't add value is absurd."

MR. ICAHN grew up in a middle-class neighborhood in Queens, and started his first business at the age of 13, when he snapped pictures of neighbors' homes. He developed the photographs in his basement and glued them to the covers of matchbooks that he would buy for 50 cents a box. He sold the boxes to homeowners for $1.50. When he turned 15, he played his own version of the ice futures market as a cabana boy at a beach club, ordering extra ice on hot mornings to sell to visitors who would run out later in the day. After graduating from Princeton with a degree in philosophy and briefly serving as a medic in the Army, Mr. Icahn landed on Wall Street, opening his own brokerage firm in 1968. In the late 1970s, he waged his first proxy battles.

When the buyout barons and corporate raiders ruled Wall Street in the 1980s, he was one of the kings. He made plays for some of the largest companies in America, including Phillips Petroleum, the steel giant USX, Texaco and T.W.A. Some were big victories for Mr. Icahn; others were perhaps more trouble than they were ultimately worth.

"He had a very devil's-advocate way of reviewing investments," said Gary Siegler, who worked with Mr. Icahn from 1985 to 1990. "You had to be able to support your point of view."

After the junk bond market collapsed and boards adopted anti-takeover measures, some raiders moved on in the early 1990s to other things. Mr. Icahn stayed the course, battling for control of the comic book publisher Marvel Entertainment and badgering RJR Nabisco to split its food and tobacco units. Some of his fights in recent years have involved technology and entertainment companies, including Time Warner, Motorola, Blockbuster and the video game maker Take-Two Interactive Software. "He's had a mixed record on returns" and in understanding the evolution of the media business, said Matthew Harrigan, an analyst at research firm Wunderlich Securities who is watching Mr. Icahn's moves against Lionsgate. Among other things, Mr. Icahn is angling to get his son and fellow chess player, Brett, who works at Mr. Icahn's company, on the studio's board.

Associates of Mr. Icahn say that his company made money on its Time Warner investment and that while his Motorola investment has not gone as well, they believe it will eventually pay off.

"We hold these things for a long time and the jury is still out," Mr. Icahn added.He has fared better in some of his biotech holdings, which make up a big chunk of the hedge fund's investments.

"The biotechs have been his big winners recently," particularly investments in ImClone Systems and MedImmune, said Mr. Young at Institutional Shareholder Services. "His thesis, which is no secret, is that biotech firms should be purchased by Big Pharma, which is always in need of new products. In his mind, that's a match made in heaven." Mr. Icahn says he has also made money in industrial and gambling companies he has acquired out of bankruptcy and nursed back to health.

He said that a couple of years ago, for instance, his company booked a $1 billion profit after selling gambling properties, including the Las Vegas Stratosphere hotel and casino, that it had picked up largely in bankruptcy proceedings. Similarly, he made an additional $1 billion or so selling energy companies he had acquired years earlier.

In those cases and others, Mr. Icahn argues that he is not given enough credit for holding companies for long periods and investing even more of his own money into the businesses to help them grow. He specifically cites his investments in a rail-car business and the automotive parts supplier Federal-Mogul. "What gives me the greatest excitement and joy is building a company," Mr. Icahn said. "By the way, it's also the way to make the most money."It may not, however, be the easiest way to make a buck. One of the companies in which he owns a majority stake - XO Communications - has been fighting lawsuits by R2, a Fort Worth, Tex., fund controlled by a hedge fund called Q Investments. The hedge fund is run by Geoffrey Raynor, a former investment banker who worked for the Bass family of Texas. R2 accuses Mr. Icahn of engaging in "sweetheart" transactions and "self-dealing" in his oversight of the communications company.

In another suit against Mr. Icahn, Mr. Raynor, through another fund, contends that "material misinformation" was included in a recent $2 billion bond offering. Mr. Raynor declined to comment for this article.Mr. Icahn, who denies all of the accusations made against him, filed his own $100 million lawsuit against Mr. Raynor recently, saying Mr. Raynor's lawsuit caused economic harm to the bond offering. Mr. Icahn called Mr. Raynor a "serial sue-er," and in a court document he contends that the hedge fund has filed 45 lawsuits against various parties in the last four years.Disputing that figure, a spokesman for Mr. Raynor says that in the last 10 years, the firm has been a plaintiff in 16 non-bankruptcy proceedings, along with the two legal disputes with Mr. Icahn.

"I've put $1 billion into this company. I don't get a salary, and I spend hours on it each week," Mr. Icahn said, his tone rising in frustration. "About $80 million of the company's revenues each year are coming from introductions I brought in."

Later, as further proof of his involvement with the communications company he proudly showed off the latest addition to a row of awards arrayed on a cabinet just outside his office. It is a large glass cup engraved with his name, declaring him XO's "salesman of the decade."

LATE last year, Donald Trump was sitting in his office when he was alerted that Carl Icahn was on the phone. Mr. Icahn told him that he had joined the Texas banker D. Andrew Beal in his effort to gain control of three Atlantic City casinos bearing Mr. Trump's name, acquiring a majority of the first-lien mortgages held by Beal Bank."He told me he was doing it because he heard I wasn't involved, but he knew I was involved, that I had a deal with bondholders," Mr. Trump said. "I was very surprised and also very disappointed that Carl got involved," Mr. Trump added. He said the two had been friends for years and that Mr. Icahn had sought his advice when he was divorcing his first wife. Mr. Trump said the two had not spoken since the call."I should be the one that is surprised he is upset," Mr. Icahn said. "I might possibly feel bad had I interfered at a time when he was running the business," but that's not the case, he added. "Additionally I find it odd that he's now claiming to be my good friend," Mr. Icahn said. "I was not surprised when I was not invited to his daughter's wedding precisely because we are not good friends."

The Trump casino deal shows that Mr. Icahn is not afraid to take on big names if there is money to be made. He also makes it clear in other dealings that he is aggressive in protecting his interests.

Consider the case involving the activist manager William A. Ackman. Mr. Ackman's fund, Gotham Partners, has sued a company owned by Mr. Icahn over a profit-sharing agreement between the men that was made about seven years ago.

According to court documents, Mr. Ackman sold his investment in Hallwood Realty to Mr. Icahn in 2003 with an agreement that if the assets were sold or transferred at a profit within three years, Mr. Ackman and his fund would get a share of the action. The assets were sold about a year later and, in an interview, Mr. Ackman said Mr. Icahn owed him about $4.7 million. The New York Supreme Court found in favor of Mr. Ackman, and the First Department appellate court affirmed that decision. Mr. Icahn has not paid any of the money and is disputing the legal fees, which with interest bring the total owed to $8 million Mr. Ackman said. "I call it my Carl Icahn money market account," he said. "I don't get these sort of rates anywhere else." Mr. Icahn responded that "I never agreed to give him the profit he now claims, and the case will be appealed."

Mr. Icahn does not seem to let anything, including a very close friendship, get in the way of protecting his and his investors' profits. Late in 2008, through his hedge fund, he sued Realogy, a real estate company controlled by Leon Black, the head of the private equity firm Apollo Management. Mr. Black was trying to reduce Realogy's hefty debt load by offering to exchange some of the debt with bondholders. Mr. Icahn, a bondholder who has known and been friends with Mr. Black for decades - the two have been longtime tennis partners - objected to some terms of the exchange and sued.

"Carl and I have been good friends for over 25 years," Mr. Black said in an e-mail message. "Occasionally we skirmish as couples are wont to do, but I believe we both feel that when the chips are down that the friendship is paramount."

How, exactly, does one sue and still be good friends with someone on Wall Street? Mr. Icahn smiles sagely over his cup of coffee: "The two of us have a saying that we always use whenever there is friction in our business dealings. We always say, 'there's only one Maltese Falcon.' "At one point in that classic 1941 film, a character chasing a valuable figurine says to a close associate, "You've been like a son to me," Mr. Icahn explains, paraphrasing from the movie.Then, lowering his voice with mock intensity, Mr. Icahn adds that the character says that if you lose a son, it's possible to get another - "but there's only one Maltese Falcon.' "

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Lessons From Pershing Square's Ackman

By Eric Jackson, Senior Contributor

03/03/10 - 06:24 AM EST

Stock quotes in this article: GGWPQ.PK , SPG , BAM , VRO , TGT , BGP , MBI

Last week, I got a chance to hear a speech by William Ackman, the CEO and founder of hedge fund Pershing Square Capital Management. If you're not familiar with this activist investor you should be, because his investment approach offers some valuable lessons.

Ackman's been in the news a lot over the past year or so.

Bill Ackman, CEO of Pershing Square Capital Management.

He took a long position in General Growth Properties(GGWPQ.PK Quote) in November 2008 and then watched the stock go from 35 cents to more than $13. The company is now the subject of a bidding war between Simon Property(SPG Quote), Brookfield Asset Management(BAM Quote) and possibly Westfield and Vornado Realty Trust(VRO Quote)

He also ran a high-profile proxy contest against Target(TGT Quote) last year that failed to win him a seat on the retailer's board, although Target's shares are still still up substantially since he launched the contest.

Unlike most funds run by activist investors, Ackman's is not a long-only fund. He typically holds eight to 10 positions, with a couple of those being short. Because of that positioning, he's done well over the last few years and has remained active and outspoken.

Always a good speaker, Ackman has definitely ramped up his media appearances over the past couple of years. Pershing Square now manages more than $6 billion in assets, with a team of six investment professionals including Ackman.

Ackman describes the fund's strategy as "concentrated, fundamental, research-intensive, and long-short." The fund charges investors 1.5% in annual management fees and 20% in incentive fees.

Pershing Square has averaged 24% annualized returns since its founding in 2002. At the moment, the fund is 23% in cash.

It never uses leverage and almost never invests in industries that use a lot of leverage, are highly sensitive to interest-rate shifts or are commodity-related. (According to Ackman, the one investment that violated this rule was Borders(BGP Quote), which has lost 95% of its value since Ackman invested in it, although Ackman says at these levels it's a great value.)

Ackman wouldn't describe his firm's strategy as activist, either on the long side when he's gone to battle with Target or on the short side such as with bond insurer MBIA(MBI Quote), which Pershing Square first shorted in 2002.

......

[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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Why Ackman Failed vs. Target

06/03/09 - 02:19 AM EDT

TGT

Eric Jackson

When Bill Ackman of Pershing Square Capital Management attended Target's (TGT Quote) annual meeting in suburban Milwaukee last Thursday it was the final culmination of a months-long proxy fight with the company's incumbent board. Although some observers, including me, predicted Ackman's slate would win one or two seats out of the five he was seeking, he came away empty-handed. Target announced at the meeting that all incumbent directors were re-elected with at least 70% of the vote.

The mainstream press immediately declared it a rout against Ackman. "Target Triumphs Over Ackman" said BusinessWeek, "Ackman Misses Target" said the New York Post. The New York Times headline read, "Target Shareholders Strongly Reject Dissident Slate."

But the truth is that the vote was far closer than how Target spun it.

The language from Target's press release includes words like "shareholders appear to have" elected the incumbent directors by a "comfortable" margin. Gregg Steinhafel, Target's chairman, president and CEO, goes on to thank shareholders for their "overwhelming" support of management. Towards the end of the press release, Target suggests it will get around to actually releasing "preliminary" voting results in three to four weeks. Final results will come later, but no timeline was provided. Technically, Target doesn't have to share the final results until the end of August -- 60 days after the end of the quarter in which the annual meeting took place.

I find it insulting to shareholders that companies can get away with not releasing voting results immediately after the meeting. A month ago, Bank of America(BAC Quote), a much larger company than Target, with more votes to be counted, and also facing a large number of dissenting shareholders, provided a detailed accounting of its tally before 5 p.m. the same day as the meeting. Target gets to drag its feet for three months, while posturing to the press working on deadline that it enjoyed a sizable win.

Doesn't this sound more like how a banana republic runs itself, rather than one of the largest retailers in the world?

Another aspect of the vote that inflated the results in Target's favor were the broker non-votes. We are now close to the end of the 2009 proxy season. Thanks to some recent changes by the Securities and Exchange Commission this will be the final year in which brokers can take all the non-votes they receive from their underlying shareholder clients and, in one fell swoop, throw the votes to management's favor. This happens in 99% of the cases in which they vote.

The Wall Street Journal recently concluded that, in most large company votes, these broker non-votes going in support of management amount to 15% to 20% of the overall votes counted. These votes should count as abstentions, since the real owners of the shares haven't indicated a preference. Starting in 2010, thanks to the SEC, that will happen.

Let's assume Target received the "overwhelming" support of 70% of their shareholders. Assuming a normal amount of broker non-votes landing on Target's side of the ledger, it appears that the vote, if it had taken place under next year's rules, would have been up for grabs.
Scott Galloway, New York University Stern School professor and activist investor with Firebrand Partners, who also serves on the New York Times (NYT Quote) and Eddie Bauer (EBHI Quote) boards, sent a tweet out after the vote saying that it was "a blow to activists everywhere." For the reasons I've outlined, I'm more sanguine. However, I think it's important to understand where things went wrong in this campaign, as I certainly thought Ackman had adequately made his case sufficiently to win at least a couple of seats.

Here's how things went off the rails for Ackman.

1. Winning a proxy contest is like passing a major bill in Congress. It's not enough to be right, an activist has to put forward an argument that is politically palatable to other shareholders. Ackman ultimately failed in his proxy contest because he failed to win over the support of the biggest holders such as the large mutual fund companies and pension funds.

Although these investors pay close attention to corporate governance matters, their primary concern as fiduciaries is the long-term health and success of the company. Activists sometimes shoot themselves in the foot with these shareholders when they advocate solutions that are perceived to provide only a short-term boost to the stock instead of a more sustainable move. Ackman's real estate investment trust plan for Target, designed to unlock value in the land under Target stores, and creative from a financial engineering perspective, got no support. It was successfully painted by Target as "risky" and out of step with the current environment. Ackman never should have included it as part of his plan.

2. The messenger is a big part of the message. Any activist investor in a proxy contest should be able to convince fellow investors that they are advocating solutions which will benefit the company in the long term. Far too many activists formerly looked for short-term levers to pull to create value in their shares owned, such as paying out a large dividend, taking on debt, selling off a division to a private-equity firm, or doing a big stock buyback.

For the most part, these strategies have hurt the target companies. There are also many activists, and Carl Icahn is probably the most well-known example, who have cultivated an image of force and intimidation.

Hedge fund managers -- and activists especially -- are still seen by outsiders as short-termists. In the case of Ackman, he is who he is: a big New York hedge fund manager. He can't change that, but that image likely did bleed away potential supporters who, when they reviewed his REIT plan and heard about the number of Target derivatives he owned, prematurely dismissed his slate for not being a "long-term investor." In the final days before the vote, Ackman went out his way to issue press releases saying he was committed to holding his personal Target shares, not his fund's shares, for at least five years if he was elected to the board. By then, it was too late to change how he was viewed by his fellow shareholders.

3. Pick bulletproof fellow directors for your dissident slate. Ackman didn't help himself with the pick of Jim Donald as a fellow director on his slate. In TV interviews leading up to the vote, Donald didn't provide a compelling list of things he was going to attack once he got elected to the board. It fed into the view that Target wasn't really badly in need of improvement.

Ackman made a big deal of Donald's experience heading up Wal-Mart's (WMT Quote) grocery division, pointing out that Target should emulate Wal-Mart's performance there. Yet Donald also brought the baggage of his bio for being ousted from Starbucks(SBUX Quote) by the guy who hired him. It's not necessarily fair, but this baggage diluted the message Ackman was trying to get across.

4. The worse the stock performance track record of a company is the easier it is for an activist to make the case for change. Joe Nocera of the New York Times took Ackman to task for his Target activist campaign. Nocera questioned why Ackman would go after Target in the first place when the company's 10-year stock performance was actually better than Wal-Mart's. Not every poorly-performing stock makes an attractive activist target, but it's clear that poor performance is a necessary condition for any activist to win over broad support.

Under the SEC's 2010 proxy rules, just as many Target shareholders agreed with Ackman that Target's performance should have been better in recent years as other shareholders who would have sided with Nocera that all this was a waste of time. Yet, as Ackman made constant suggestions that Target should be more like Wal-Mart, it would have helped him more if there was clearly a stark difference between the stock performances of the two companies over some time. It wasn't compelling enough.

I am heartened by how many shareholders last week voted for an activist campaign that, although far from perfect, would have improved on the status quo at a sleepy board. Ackman made mistakes in this campaign that lost him the trust of the long-term holders of the stock. Even still, the final tally likely will show a very close contest.

And next year's new rules from the SEC will mean that investors like Ackman will no longer have to pay $15 million to run proxy contests. Target's vote is more likely to be an early warning of future activist successes than a death knell.

At the time of publication, Jackson owned no shares in the companies mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Ackman Vs. Target

05/27/09 - 12:07 AM EDT

TGT , WMT , COST

The much-anticipated annual meeting of retailer Target(TGT Quote) is Thursday and large shareholder Bill Ackman of Pershing Square has been in a long-running battle for the past several weeks to win five seats on the board.

Ackman has spent $10 million to $15 million of his own money on his campaign thus far. Although he's won over the support of two influential proxy advisory firms -- RiskMetrics and Proxy Governance -- he faces a daunting task in winning Thursday's vote. In its latest issue, Barron's magazine proclaimed that Ackman's campaign was "off-target," stating that "Ackman's initiative could be one of the worst-conceived efforts in recent years by an activist investor."

On Tuesday, Ackman pledged to retain his stake in Target for at least five years if he's elected to the company's board. He said his personal stake in Target is now worth more than $55 million.
Here's my view on the campaign.

A Review of the Fight

Ackman's Pershing Square has been a shareholder in Target for more than two years. In 2007, he opened Pershing Square IV, which was a fund solely dedicated to investing in Target. Pershing's funds own 3% of the stock outright with options to purchase at least another 2%, many of which are already in-the-money.

From very early on in his stock ownership of Target, Ackman has been an outspoken critic of the company. His calls for the company to unlock value in its real estate holdings date back to at least 2007.

Earlier this year, Ackman apologized to investors in Pershing Square IV after his option bets on Target had gone against him resulting in a drop in fund performance of 89.5% as of the end of January. Target management has used Ackman's option holdings to imply that he's more a short-termist than other investors and that his proposed changes are riskier.

Ackman's plan for Target consists of four parts: (1) unlock up to $40 billion in real estate value by placing the land under the stores in a real estate investment trust structure and then leasing back the land from the REIT; (2) sell the entire credit card operation; (3) improve the quality of the board of directors; (4) close the performance gap over time with Target's No. 1 competitor Wal-Mart Stores(WMT Quote).

Proxy Governance has supported Ackman's activist efforts and his full slate of nominees for Target's board. RiskMetrics, the more influential of the two proxy advisory firms, has recommended two of Ackman's five nominees (Ackman himself and Jim Donald, the ex-CEO of Starbucks(SBUX Quote)). Glass Lewis, another proxy advisory firm, has rejected Ackman's nominees and supports Target's full slate.

In the weeks leading up to Thursday's vote, Ackman has taken to the airwaves to make his case. He's an exceptional communicator. He's clear, thoughtful and forceful in making his case. I don't think there's a better activist investor currently practicing today when it comes to communication skills.

Target, for its part, also has been pushing its rebuttal to Ackman's criticisms, taking 10 minutes at the beginning of its most recent earnings call to cast doubt on the Pershing plan.

What's Worked With Ackman's Campaign

1. Target's performance has clearly lagged Wal-Mart's recently, and that's relevant. Barron's includes figures in its article that show Target's total three-, five- and 10-year returns vs. Wal-Mart, Costco(COST Quote), and the S&P 500. The results are through April 30, and cite Morningstar. The reported returns imply that Target's returns have been pretty good on a five and 10-year basis, even though they've lagged their peers in the last three years.

I was incredulous after reading this and so I went to Morningstar to revisit these numbers. What I found on its site tells a different story than the Barron's numbers. On the currently reported numbers (through May 22), Target's year-to-date, one-, three-, five- and 10-year returns all clearly lag their industry and the S&P, although the five and 10-year are roughly comparable with Wal-Mart).

2. This Target board is out of touch, like many corporate boards. There are many compelling points Ackman makes about how out of touch the Target board has become. Its directors currently own only 0.27% of the total Target shares outstanding. Many directors only hold shares given to them through options or equity grants. They've consistently relaxed the director tenure limits to allow directors like former Telstra CEO Sol Trujillo to serve up to 20 years on the same board.

Most corporate governance experts would tell you that a director no longer has "fresh eyes" to look at a company's issues and challenges after eight years on the same board. A two-decade term limit is outrageous. It's also ridiculous to hear that Target's nominating committee refused to meet with Ackman or his nominees about joining the Target board last year but paid themselves fees for sitting on this committee, even though that committee didn't meet once formally during the year. I can't recall seeing that in a recent large company proxy.

Target's board deserves a revamp. Its practices suggest a cozy group of insiders seeking to protect their job security as directors, rather than doing the right thing for shareholders. Things likely will change significantly in future boardroom battles, as last week the Securities and Exchange Commission threw its support behind "proxy access," which would make it much less expensive to mount campaigns and give shareholders a real choice in who they want to represent them on the board instead of only choosing from the incumbent slate. If Target's board doesn't change Thursday, it most certainly will next year.

3. This is a legitimate campaign -- not a distraction. As the Barron's article stated over the weekend, there is no shortage of management apologists who come out of the woodwork when there is a dissident proxy fight. Most of the time these commentators who support the status quo usually complain that the company isn't the worst of the bunch and therefore an activist campaign is a waste of time and a distraction.

That approach has allowed mediocre boards to persist in this country for decades. As the points I've mentioned verify, this campaign certainly has merit. What's more, Ackman has paid his way to put it on. He has real "skin in the game" -- unlike most, if not all, of these kinds of critics. The fact is that if more mediocre boards had been "distracted" by legitimate activist campaigns over the past two years it's likely we'd have a much stronger capital markets system today than the one which absolved itself of any risk management responsibility.

4. Ackman's made a great case. I tip my hat to Ackman, including his spirited attack of the Barron's article, for being a very precise and skilled communicator. I think he's made about as strong a case as an activist can make at this time against Target.

What Hasn't Worked

1. Target's poor performance relative to Wal-Mart hasn't been compelling enough. It's hard to win an activist campaign arguing what Target should have done in the last few years. Shareholders are human. They take short-cuts, they summarize, they look for sound-bite logic for understanding a campaign, and then they base their voting decisions on this incomplete information. Some shareholders rely heavily on what the major proxy advisory firms say when deciding how to vote. Although Ackman's made some salient points on how Target has lagged Wal-Mart, he will not gain as much shareholder support as he could have if the gap had been much more compelling.

2. The REIT component of Pershing's plan doesn't match today's environment. A large part of Ackman's plan includes increasing shareholder value through creating a new Real Estate Investment Trust. It matters not that Target uses Richard Sokolov, the president of Simon Property Group (SPG Quote) (who competes against General Growth Properties, of which Ackman is a large owner), to discredit Pershing's plan. The optics of the plan don't match the current environment we're operating in even if the substance of the plan is on the mark. It will be difficult to convince many investors to take a leap of faith on a sudden creation of $40 billion in value from moving a few shells around. At the moment, skepticism reigns.

3. Jim Donald's communication skills haven't matched Ackman's. As RiskMetrics' recommendation confirms, there appears to be the most support for Donald as a second pick for the Target board after Ackman.

During a recent joint CNBC appearance, Donald, who also helped build Wal-Mart's grocery business before leaving for Starbucks, failed to match Ackman's oratory skills. When someone questioned Donald about what changes as a director he'd like to see Target make, he deferred, saying that he needed some time to study things in more depth. It was modest and diplomatic but not in keeping with a bloody-nosed proxy fight.

What's more, it played to what Target has tried to press -- that there's nothing that significant to fix at the company. It would be ideal if all shareholders took the time to review all candidates' utterances prior to forming their selections, but unfortunately sound bites matter, and that one hurt.

When all is said and done Thursday, I expect that Ackman will win two seats on the Target board, along the lines as RiskMetrics suggests. In the long run, it should greatly help Target's other shareholders and prove the naysayers wrong. Ackman hasn't run a perfect campaign, but it's been very effective, and he will consider it a success with this kind of outcome. It also will give him the chance to further press his views at the board level. It's likely that Thursday's showdown will be a preview of many more activist contests to come next year, once the new SEC proxy access rule goes into effect. Sleepy boards should get ready for more distractions.

At the time of publication, Jackson had no positions in the companies mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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SEC May Shift Board Control

05/20/09 - 08:42 AM EDT

TGT , BAC , C

On Wednesday, the Securities and Exchange Commission will hold meetings on whether and how shareholders should be allowed to nominate directors to boards of companies in which they hold stakes. If a rule is agreed upon and put in practice in the next 90 days it could dramatically change the relationship between shareholders and management teams for years to come.

The normal course of business since the SEC was created decades ago was that management holds all the cards in selecting its board and insulating itself from criticisms from shareholders. Management picks the directors it wants, it can stagger its re-elections to make it next to impossible to overturn the board in any one year, and shareholders face huge costs and long odds in putting up their own candidates.

Even after the Enron and WorldCom scandals earlier this decade, the SEC saw fit to change nothing with respect to making corporate boards more accountable to shareholders. That's about to change.

With the latest downturn, and the large antipathy directed towards the SEC from the media and shareholders thanks to its overlooking Bernie Madoff and doing nothing to prevent large institutions like Citigroup(C Quote), Lehman Brothers, and Bear Stearns from imploding, the SEC can no longer look the other way. Chairwoman Mary Schapiro was brought in with a mandate and, so far, she's giving every indication that she's cleaning house and going the extra mile to give shareholders a voice for their concerns. All this has implications for the number of shareholder activist battles we'll see starting in 2010 and beyond. But more importantly it should truly improve the risk-adjusted returns for all public companies.

A few weeks ago, the SEC took an important first step in helping shareholders have more of an impact in annual votes. It announced it intended to get rid of "broker votes" being counted in favor of a management team's incumbent slate.

To explain how this works, take the recent case of Bank of America's (BAC Quote) annual meeting last month. Most press coverage focused on how a shareholder resolution was passed with a majority (50%) vote that stripped CEO Ken Lewis of also holding the chairman title. However, the truth is that broker votes played a key role in preventing other significant changes from occurring at the same meeting.

Here's how it works: Broker votes are those placed by brokers who hold the stock in the name of their clients. If these brokers don't receive specific instructions on how to vote their shares during proxy season (which happens the vast majority of the time for the vast majority of proxy votes), the brokers can vote them in the manner they see fit. About 99% of the time this means voting the shares in favor of management, artificially raising the perception of how much support there is for management among shareholders.

For Bank of America's vote, the Wall Street Journal calculated that broker votes would account for about 22% of the overall vote. This means that if BofA's vote had been held in 2010 instead of 2009, when broker votes will not be counted towards the election results, the shareholder proposal to separate the chairman and CEO titles would have been 64% instead of 50%. Moreover, based on last month's shareholder results, it's likely two other shareholder propositions would have passed: (1) allowing shareholders to call special meetings to possibly replace members of the board and (2) an advisory vote of executive compensation, or so-called say-on-pay. Two directors, Lewis and Temple Sloan, also would have received enough votes to vote them off the board entirely.

With the debate about allowing shareholders more "proxy access," the SEC is suggesting shareholders receive a more direct say on who will be elected to a board, at a significantly lower cost. Until now, it's been entirely the choice of management who gets elected to serve on the corporate board. Shareholders simply get to vote up or down on these nominees. The SEC wants to allow shareholders to put forward their own nominees for directors to be voted on. If there are eight spots open on the board, and eight put forward by management and four put forward by shareholders, the SEC is saying, "Let the best eight candidates with the highest number of votes serve." Sounds very democratic, doesn't it?

It's quite conceivable that in a few years at least the largest shareholders will see all potential directors parade through their offices in the weeks leading up to an election, pressing the flesh and making their case to be elected, much like politicians do in general elections.

The SEC's proposed rule, which will be debated Wednesday, will require shareholders to hold 1% of the company's shares outstanding in order to nominate directors to serve on companies with a market capitalization greater than $700 million. For companies under $700 million in market cap, shareholders will need to hold 3% in stock; for companies under $75 million in market cap, shareholders will need to own 5% of the shares outstanding.

By asking for "skin in the game" from shareholders who want to suggest candidates, the SEC hopes to ensure the candidates are of the highest quality and the suggestions are from the most serious shareholders.

Take the current battle being waged by Pershing Square's Bill Ackman, who is seeking to elect four directors to Target's(TGT Quote) board. He's estimated the current proxy battle, which will be resolved next week, is costing his firm $10 million to 15 million. He will pay this out of his own pocket, even while the incumbent board pays for all of its costs out of shareholders' pockets. It shouldn't be so costly or on such uneven terms to put forward some candidates for consideration.

When I hear management -- like that of Target -- complain that a shareholder challenge is too distracting and costly that it keeps it from running the business, I think to myself that if management had done a good enough job of running its business to begin with in the first place, shareholders wouldn't have been forced to take up a crusade against it.

These new shareholder-friendly rules from the SEC will serve all shareholders better than the old skewed rules. There will be a burst of challenges in 2010 and 2011 in response to these new rules and many boards will see their composition change significantly in response to the challenges. My prediction is that this initial "cleansing period" will prompt other boards to preemptively change themselves before being forced to by their shareholders. Counter-intuitively, I expect these new rules, in the long run, to lead to fewer shareholder showdowns, not more. Sunlight is the best disinfectant and the ability to cost-effectively run a credible proxy contest against a sleepy board will rouse many of these boards to heal themselves of what afflicts them.

At the time of publication, Jackson had no positions in any stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Cheering for Bill Ackman at Target (TGT)

I read Jesse Eisinger's great profile of Bill Ackman of Pershing Square in my final copy of Portfolio Magazine.

Bill took some shots when his Target (TGT)-only fund was down 93% earlier this year. He had to apologize to his investors, loosen the fund terms and injected $25 million personally into the fund. AG Andrew Cuomo even called Ackman up to compliment him for how he handled the situation.

The last I heard, Ackman's TGT-only fund's return was -50% -- still a big loss, but a remarkable achievement in a little over a month off the bottom. This jump corresponds with TGT's move from its early March bottom of $25 to around $40 today.

Ackman's results show how quickly a one-investment fund, combined with the use of options, can see performance dramatically increase (or decrease). (Ackman has already said he'll likely never do a single investment-fund again.) There is still a good chance that this formula will assure he returns all the original money to his investors and, who knows, maybe even return them a small profit.

I'll be cheering for Ackman. He's got ideas in spades, which is something the world needs more of these days. And, besides, who doesn't love a happy ending?

Position: None.

Originally published in RealMoney.com on 5/6/2009 1:37 PM EDT

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Government says C and BAC need capital: Look to Debtholders

News leaked out overnight that the government is now pushing Citigroup (C) and Bank of America (BAC) into raising more capital.

The news is likely short-term bullish for the markets but bearish for Pandit and Lewis keeping their jobs much longer.

Tomorrow is D-Day for Ken Lewis, when he'll face down his shareholders at the BAC annual meeting. A large 'against' vote cast against his re-election could spell curtains for him. This news doesn't help him and he and his supporters will take note of the timing of the leak.

After watching the Bill Ackman and Joe Steiglitz interview with Charlie Rose from last week, I wonder why the government doesn't look to these banks' debtholders as sources for the needed capital -- namely in converting their debt to equity. The taxpayers aren't going to sign another blank check and private capital doesn't want to be a hero. Forcing these debtholders into equity will get these banks to quickly get out from paying endless interest and force them to grow their capital by making loans.

Position: None.

Originally published in RealMoney.com on 4/28/2009 7:42 AM EDT

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The Bullish Case for Hedge Funds

From TheStreet.com

By Eric Jackson

12/26/08 - 12:56 PM EST

The one group of investors that's been vilified more than any other by the business press and government officials alike in 2008? Hedge fund managers.

After years of rapid growth in terms of both assets and numbers of funds in operation, the hedge fund industry has taken a PR black eye this year. Media reports would have you believe that the industry is about to collapse in size, see its revenue drop dramatically through fee reductions and become heavily regulated to protect unsuspecting investors from another Bernie Madoff scam.

Hedge funds certainly make an easy target. They've had a bad year, along with every other retail and institutional investor. But the industry is about to grow dramatically over the next five years. This coming year will mark the beginning of the next wave of this industry's growth.

The 12 months of 2008 have proved an abysmal year, and every investor can't wait to be done with it. While hedge fund managers have done terribly, (with the exception of maybe Bill Miller) no one in the media seems to criticize the mutual fund managers or other wealth advisors for lousy performance.

It seems to be an unstated opinion in many articles that hedge fund managers should know better than other investors. One simple reason for this, a reason that draws endless attention and criticism, is hedge fund manager compensation. It's true that the best-performing fund managers over the last few years have been well compensated.

I don't have a problem if a hedge fund manager, the CEO of Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) or the head of risk management at Citigroup (C Quote - Cramer on C - Stock Picks) gets paid boatloads of compensation year in and year out, on two conditions: (1) they should only be paid well based on their direct contribution to the performance of their firms, and (2) that performance should be "real" performance, meaning that there is real value created, not some illusory accounting profit.

Hedge fund managers have an advantage over those who hold the types of positions mentioned above. First, as with a sales rep, you always know how a hedge fund manager is doing. With the exception of managers that dabble in private equity or illiquid assets, which are more difficult to manage on a daily mark-to-market basis, any hedge fund investor could get a daily report on how a manager is performing.

And hedge funds -- even the big ones -- are still small shops. If a fund has a good year or a bad year, its manager, whether it's Stevie Cohen or Bill Ackman, gets the credit or the blame. They don't get to punt responsibility to a foreign office or a snowstorm that kept away retail shoppers.

The second advantage hedge fund managers have over others when it comes to their compensation is that their performance is "real" at the end of each calendar year. Simply put, the market value of your portfolio this year gets measured against last year's market value.
Whether or not these profits were aided by leverage, hedge fund managers must perform in order to be compensated. While others can use their political skills to keep their jobs, hedge fund managers have to live with their fund's performance and the consequences that performance brings.

After a disastrous 2008, the big commercial banks are holding back recently injected capital from taxpayers to pay out year-end bonuses. However, few hedge funds (with the exception perhaps of the 10% that made money this year) will pay out bonuses.

What's more, many of the hedge funds that lost money for their investors this year adhere to "high-water marks." This means they have to make back their 2008 losses in 2009 before they are eligible for future bonuses. Investors get made whole and their managers only get bonuses when they actually deserve them. Citigroup investors sure wish they could get that kind of arrangement.

Hedge fund managers -- unlike mutual fund or other private wealth managers -- get paid for performance, not assets. Their incentives are perfectly aligned with their investors. They make calculated bets and expect to be highly compensated only when they succeed. This arrangement has attracted and will continue to attract talent. The best managers will migrate to hedge funds because they can be more successful financially.

They also accept the financial and reputational pain of performing poorly. Even with less leverage and more regulation, the hedge fund industry is still the best game in town for the most talented managers.

And it's also the best game in town for investors -- which is why the industry is set to begin its next wave of growth in the next five years. The most sophisticated investors still need help managing their money. They are not going to hoard Treasury bills forever.

Do you want to invest in a mutual fund manager incentivized to grow assets but not necessarily performance? Would you not, if you had the opportunity, want to invest in the best qualified money manager?

It's true that Bernie Madoff's Ponzi scheme has shaken the trust of investors in all money managers, and that will have a fallout effect on hedge fund managers. However, the hedge fund industry will be much bigger in 2013 than 2008.

Here are some other fearless predictions for the industry:

• The number of hedge funds will decrease by 30% between the start of 2008 and the start of 2010, but the assets under management will actually increase as investors seek out the best managers.
• This growth will come at the expense of the mutual fund industry and wealth management.
• The due diligence industry, which researches hedge funds and their managers, will quadruple in size. Today, there are few firms with expertise in this area (Due Diligence Consulting, Kroll and Backtracks are on a short-list of firms with expertise in this area). Investors will need to invest in hedge funds, but won't be able to rely on the Securities and Exchange Commission to conduct their due diligence. They won't mind paying for this work themselves.
• The "2 and 20" fee structure for the industry (under which hedge funds charge 2% annually for management fees and 20% for the share of the profits created) will persist. Investors will not object as long as they receive the performance they expect.
• Fund-of-hedge-funds will be most negatively affected by 2008. Larger institutional investors will become much more hesitant to invest in fund-of-hedge-funds over the next two years in the wake of the Madoff scandal for fear of criticism from their own investors. These types of funds will not go away, but there will only be so many people that can say, "I can get you into John Paulson's fund."
• There will be more hedge fund regulation from Washington but not to the extent that it kills the industry. What purpose would that serve the Obama administration? A greater administrative burden dealing with new regulation will become the new cost of doing business for hedge funds. It will make it harder for newer/smaller hedge funds.
• Hedge fund managers will become better risk managers and learn to perform without the benefit of leverage. Those with enduring strategies that can create value will grow.

Hedge funds are not going away. They're actually going to greatly increase in size over the next five years. The level of dissatisfaction in mutual fund managers and private wealth managers will cause investors to seek out better-performing investment vehicles for their cash. Although there will certainly be changes to the industry as a result of the events of 2008 -- including hedge fund failures in the next six months -- the future looks very bright for hedge fund managers and their investors because their interests are so well-aligned.

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TheStreet.com: Why 2009 Will Bring More Activism

From TheStreet.com:

By Eric Jackson

12/11/08 - 09:59 AM EST

With the market's tumultuous last few months driving down the price of equities, activist investors around the world have seen their stock investments take major hits.

• Carl Icahn has watched the value of his Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) stake drop in half since May;
• Ralph Whitworth of Relational Investors recently resigned from the board of Sprint Nextel (S Quote - Cramer on S - Stock Picks) but kept his stake in the company, even as shares have dropped 80% this year;
• Chris Hohn of The Children's Investment Fund exited his J-Power position at a loss earlier this year, after his calls for change were beaten back by the Japanese utility. Some market-watchers suggest that after 10 to 12 years of growth as a strategy, investor activism is dead. Why? Poor returns, they say, and because the freezing-up of the credit markets prevents activist shareholders from calling on companies to lever up with debt to fund stock-buyback plans or increase dividends.

However, 2009 could very well prove one of the busiest years for activist investors in the last decade. I count 10 reasons why.

1. Obama will look favorably on pro-shareholder measures. Republican Securities and Exchange Commissioners have typically supported pro-management/Business Roundtable policies. Democrats have been much more supportive of shareholder activists. The Business Roundtable and other pro-management groups have portrayed shareholder-friendly measures -- such as making it easier to run alternative board candidates on the company's proxy -- as moves that empower fringe, or special interest, shareholders such as the AFL-CIO and Teamsters at the expense of plain-vanilla investors (retail or institutional).

Obama supports a different view and will likely equate more shareholder rights that promote better governance with better shareholder returns over time.

2. The new SEC Chair will sponsor several new shareholder-friendly measures. Obama will appoint an SEC chairman in the image of the last Democrat to hold that position, Arthur Levitt -- someone who will fight for openness, fairness and rights for all shareholders.
"Proxy access" was an initiative supporting the rights for shareholders to put forward alternate names of directors to be elected at the annual meeting proxy vote. Instead of having to fund a proxy contest themselves (vs. an incumbent board funding their re-election with the shareholders' money), "proxy access" would have allowed for these alternate names to appear on the company's own proxy and let the shareholders simply vote for the most qualified people to represent shareholder interests. This initiative died when the two Democratic SEC Commissioners retired and were not replaced.

Expect "proxy access" to return in the new administration in some form, helping to ensure the best possible people are serving as directors on our boards.

3. Valuations are on the floor. Activist investors are typically value investors who layer their activist efforts on top of a buy-and-hold approach to an undervalued stock. Value investors have been especially hard hit this year. Fortunately, the mass selling appears to have stabilized. While cheap should never be confused with value, it's likely that valuations will rise over the next 12 months and take the fortunes of activist investors with them.

4. A flight to quality in hedge funds will benefit activist investors. The hedge fund industry is going through a remaking of itself and will no doubt be a much smaller industry two years from now. The biggest and most successful ones will grow in a flight to quality. Activist investors with long and successful track records will benefit, even if their returns in 2008 are poor. Institutional investors can understand the activist strategy and how it's executed. It's not a black box and that is going to be helpful to activists in raising capital over the next few years.

5. Management and corporate boards will not want to be viewed as anti-shareholder. After seeing their market capitalizations decimated over the last 12 months, boards and management teams at public companies are sensitive to criticism. Lavish pay and executive perks are out. Assuming activists have legitimate arguments about actions that will unlock shareholder value, it will be much easier for them to get the ear of managements and boards in the next 24 months.

6. There will be a wave of industry consolidation. M&A has dried up in 2008 as corporate acquirers and targets kept their heads down in the foxhole. That's about to change. With valuations so low, there's never been a better time for stronger players to pick off the weaker ones in their industry.

At the same time, no board wants to make the mistakes that Yahoo! and Take-Two (TTWO Quote - Cramer on TTWO - Stock Picks) did this year by playing hard to get when a rich buyout offer came along. Activist investors will play a background role. For example, look for Bill Ackman of Pershing Square to push together Barnes & Noble (BKS Quote - Cramer on BKS - Stock Picks) and Borders (BGP Quote - Cramer on BGP - Stock Picks) (as he has a stake in both companies).

7. Activists have the longest lock-up periods of any hedge fund class, so they can put fresh capital to work. With hedge funds reeling from heavy redemptions, the funds in the strongest position this year are the ones with the longest lock-up periods. A lock-up is the amount of time a hedge fund investor must keep his/her money invested in the fund before being able to redeem.

Activists, at least the most successful ones, have among the longest lock-ups in the hedge fund industry, at 3-5 years. The logic for asking for such a lock-up is that activists understand that their hold period in a particular position might be many years, comparable to a private equity holding period. Unlike private equity, though, activist investors have their positions marked to market every day.

Activists know a six-month investment return in Sprint is likely to differ from a three-year investment return. With these long lock-ups, activists will be less affected by heavy redemptions this year than most other hedge funds. This means they'll have more money to put to work next year.

8. Limits on short-selling will benefit activists. As previously mentioned, the SEC is about to become more shareholder-friendly under the new administration. The agency also will likely seek to promote growth in the stock market. Short-sellers could come under more restrictions, promoting long-biased investors. Although no outright ban on short-selling will occur, a return of the uptick rule is likely. Any limits on short-selling like this will help long-biased investors like activist investors.

9. Activists will become more balanced on the long and short sides. Even though activists have typically been long-biased or long-only before 2008, the only investments that have made money this year are short bets. Activists will learn from this year's action to have a more balanced portfolio of investments on the long and short sides. Some activist investors like Greenlight Capital and Pershing Square have always taken this balanced approach. Expect others to follow their lead. This will improve performance and provide them with more capital to put to work in additional activist campaigns.

10. There's more to get "active" about than ever. Even post-Enron and post-Sarbanes-Oxley, 2008 has shown shareholders that there is more than ever to get outraged by in the actions and inaction of corporate boards.

Where was the oversight at Bear Stearns, Lehman, Citigroup (C Quote - Cramer on C - Stock Picks) and GM (GM Quote - Cramer on GM - Stock Picks) this year?

We hear a lot of CEOs and boards refer to a "perfect storm" occurring this year, an attempt to place responsibility for their companies' results on events outside of their control. Bob Rubin, director at Citigroup, recently said it wasn't realistic to expect a year ago that housing prices would drop as precipitously as they have. Although no omniscient board has yet been found, there are many that did an excellent job at protecting and growing capital in the last year.

As activists challenge the poorer-performing boards, the result will be stronger companies and better performance in the future. If these shareholder representatives are not questioned and are allowed to continue rubber stamping the will of management, we will have learned nothing from the debacle of the last 12 months.

At the time of publication, Jackson and his fun had no positions in stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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