Hedge fund activism: insights from a French clinical study

Abstract

Over the period from October 2006 to May 2008, Atos Origin, a French information technology company, was the target of two activist hedge funds, Centaurus and Pardus. This article investigates in detail how the activists initiated their actions, how the management organized its defence and how both were received by the market. The analysis reveals that, although Atos seemed to be an attractive opportunity, the funds failed in their primary objective, the sale of the target. In fact, the chairmen of Atos succeeded in discrediting the two hedge funds by getting support in the French context, not particularly prone to and sometimes even hostile towards shareholder's interests. Our findings show that the success/failure classification used in large-sample studies, and based very often on officially stated goals, bears a considerable risk of misinterpretation. The Atos case shows that empirical studies should more heavily rely on what really matters for hedge fund activism, i.e. the sale of the target, spin-offs or cash-outs. While governance related motives are often mentioned and easily enforced, they do not make activism profitable and cannot, by themselves, be considered as primary motives for hedge fund activism. As a consequence, the success of hedge fund activism should be assessed considering primary motives only.

Keywords:

• corporate governance
• activism
• hedge funds
• corporate defenses
• entrenchment

JEL Classification:

• G30
• G34
• G23

Acknowledgements

We are grateful for helpful comments from the participants at workshops at Montpellier and Toulouse Universities, at the 2009 French Financial Association Annual Conference in Brest, France and the 8th Governance International Conference in Florence, Italy. We also would like to thank two anonymous referees as their interesting remarks helped us to improve our work. Of course, all remaining errors are our own.

Notes

¹ ‘Traditional investors’ generally cover pension funds, mutual funds, banks and insurance companies. Although hedge funds are considered to be institutional investors, they are often presented as nontraditional investors. In the literature on activism, this distinction has been introduced to underline the fact that hedge funds have developed a new form of activism (Kahan and Rock, 2007; Boyson and Mooradian, 2008; Brav et al., 2008).

² At this time, Centaurus had USD 4 billion assets under management. No precise information was available for Pardus.

³ Empirical evidence in the UK does not always show a perfect alignment with the US case. See, for instance, the role of hostile takeovers as a corporate governance mechanism in Sinha (2004).

⁴ See Bebchuk (2005), Enriques and Volpin (2007) and Santella et al. (2009), even if Laporta et al. (1998, 2000) show that the US and the UK common law tend to offer better protection for minority shareholders than civil law systems.

⁵ Comparing corporate laws in different countries, Roe (2002) states that France does not ‘look bad in protecting minority stockholders’ (p. 39).

⁶ This reluctance takes its sources from the post-war period and the 30-year growth (1945–1975) during which the French planning was implemented (see e.g. Petit, 1984; Hall, 2006). This period however appears successful and somewhat mythical for French people, with strong and successful interventionist economic policies. State interference in large companies’ strategies is still intense, not only in State companies.

⁷ http://www.worldvaluessurvey.org. Relevant data examining attitudes towards capitalism are analysed in Landier et al. (2008).

⁸ Brav et al. (2008) underline the difficulty to examine fund tactics and target responses with a large sample due to the heterogeneity of strategies, and rely on classifications. For instance, they consider target reactions by grouping them into three categories: accommodate and negotiate resist.

⁹ We did not use an industry-adjusted index model (as do for instance Dittmann et al. (2008) in the TUI-Preussag case) because Atos and Cap Gemini are major components of French and European computer services indexes. Excluding Atos from the index would limit the study to a basic comparison with Cap Gemini.

¹⁰ Atos’ stock experienced a −23% raw return over the 3 days including and surrounding the profit warning (event window [−1; 1]).

¹¹ At the end of 2006, Atos estimated its floating stock of shares at 100% of shares… versus 45% by the end of 2000 (Atos 2006 Annual Report, p. 15).

¹² This more mitigated result may be explained by the fact that Pardus was, at the same time, experiencing problems with another target, Valéo, in which it had a stake and opposed the board of directors without ever being able to impose its opinions.

¹³ One of the candidates proposed by C&P was Colette Neuville (chairwoman of the ADAM, the French minority shareholders’ association), well-known in France for her independence.

¹⁴ C&P also tried to find political allies. Thus, Pardus’ chairman met several politicians to draw their attention to the fact that the hedge fund activism around Atos was being observed by many foreign investors, still hesitant about coming to France. (‘Il n’y a pas de véritable démocratic actionnariale en France – There is no real shareholder democracy in France’, La Tribune, 22 April 2008).

¹⁵ ‘Les fonds activistes menent la bataille chez Atos – Activist funds lead the battle at Atos’, Le Monde, 3 April 2008.

¹⁶ In the AMF-release from January 2008, C&P mention the possibility for a hostile takeover of their target, if their request for representation on the Supervisory Board is not fulfilled.