Intellectual Activism's Impact On General Growth

By Eric Jackson

12/23/09 - 06:01 AM EST

Stock quotes in this article: GGWPQ , SPG

NEW YORK (TheStreet) -- It used to be that activism was conducted by poison letters to management from Dan Loeb, or by acerbic rhetoric leaked to the mainstream press from Carl Icahn. But a new kind of activism is being waged by leading hedge funds with positions on both sides of the trade in bankrupt mall owner General Growth Properties(GGWPQ Quote).

Pershing Square Capital Management, Hovde Capital, and T2 Partners are taking turns exchanging their analyses on why they think the stock is under- or over-valued. These intellectual arguments aren't just academic pursuits. They're having large effects on the stock price. Some of the smart money will be right, while others won't look so smart a year from now. Here's what you need to know to take advantage of this new kind of activism.

General Growth started in 1954, when two brothers founded a strip mall in Cedar Rapids, Iowa. The company hit a $20 billion market capitalization in April 2007 and is now one of the top mall owners in the country today. But General Growth took on a lot of debt in the credit expansion and was unable to roll over this debt when the lending markets froze, leading to their bankruptcy in April.

The company entered bankruptcy on April 16 with its common shares trading then at 60 cents each The shares have had quite a run since then, touching $12 two weeks ago.

Back in May of this year, Bill Ackman of Pershing Square profiled the bullish case for General Growth at the Ira Sohn Research Conference. He laid out a convincing case for the unique value embedded within General Growth. Unlike the vast majority of bankruptcies, Ackman argued General Growth's was unusual because its net assets were greater than its net liabilities. The company had a liquidity issue, not a solvency issue, Ackman said. Occupancy rates were still high, net operating income (NOI) was steady, and the company owned some of the more prestigious malls in the country across a wide footprint, he contended.

In the extremely conservative scenario, Ackman suggested that the equity value of General Growth was $10 per share at that time. With more normalized assumptions, giving value to the management company and several undeveloped properties and assets, Ackman said the equity value per share would be above $30. As long as the broad economy didn't sink into a severe recession, Ackman said he expected there would be value for equity holders after creditors were compensated.

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

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Activists Must Adjust Their Aim

HEARD ON THE STREET

APRIL 27, 2009

By GREGORY ZUCKERMAN, The Wall Street Journal

It's hard to scare a target when you are on the run yourself. But that is the awkward position in which activist investors find themselves.

Activist funds lost almost 10% in the first two months of this year, after falling almost 31% last year, according to Hedge Fund Research. That's worse than other hedge funds and in line with the overall market, suggesting that many are simply long-only investors who take concentrated positions in single stocks.

Meanwhile, many of the largest activists are dealing with unhappy investors who are fleeing their hedge funds. A focused fund started by William Ackman succeeded in getting Target to buy back shares, among other things. But Target has resisted some of his other suggestions. And amid the market downturn, Mr. Ackman's Target fund has lost more than 50% since its launch.

Despite such setbacks, activists might again be trying to flex their muscles, pumped up by gains of 9.3% in March. Carl Icahn has been pushing top executives at Amylin Pharmaceuticals to trim waste and not resist any possible sale. Smaller hedge funds such as Ironfire Capital are preparing to launch campaigns, according to people familiar with the matter.

The question is what playbook will work in today's environment. Activists have spent much of the past few years pushing companies to take on more debt and pay out cash to shareholders. It turns out that many of the companies were correct to try to conserve cash for a rainy day, given the tsunami in the markets and economy that subsequently resulted. Companies should easily shrug off pressure to return cash right now.

Another activist favorite, pressuring companies to break up or sell themselves, also could be a challenge. Financing markets remain in disarray and valuations are distressed in many cases.

And such attempts have included notable failures. Investors jumped into Yahoo stock when Mr. Icahn last year pushed the company to sell to Microsoft, figuring he could bridge the gap between the two sides. But they still are dragging their feet, and Yahoo is down more than 40% since he got involved.

A more fruitful area could be on forcing cost cuts. Activists have often targeted entrenched and overpaid managers they believe are looking after themselves rather than shareholders. With many executives receiving generous compensation packages, even as their companies struggle, there could be plenty fodder for activists. A range of academic research suggests that hedge-fund activists have had a positive impact in areas such as reining in executive pay and perks.

Research also shows that activists can have a positive impact on long-term share prices, although some studies cover bull-market periods when companies could be successfully prodded to sell themselves or certain assets and pile on debt to boost payouts. In today's leaner times, activists have their work cut out demonstrating that they aren't a spent force.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

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