Have we reached an era where hedge funds are simply too powerful? Is there such a thing as hedge fund over-activism? Marty Lipton, a defender of so many major companies, acquisitions bar, sure thinks so and I agree with him.
This morning's New York Times has a terrific piece by Andrew Ross Sorkin that covers Lipton's screed, where the chief partner at Wachtell, Lipton, Rosen & Katz, notes that with David Einhorn's lawsuit against Apple's (AAPL) proxy statement, hedge funds have gone too far in their democratic initiatives. After all, Apple's been among the greatest wealth creators of all time, so why pick on it by suing the firm for not doing enough for shareholders; the real essence of Einhorn's claims.
Now I know plenty of people who are cheering for Einhorn because if the preferred plan he wants gets approved the stock might go higher. I say might because there's nothing written that says Einhorn's suggestion would necessarily propel Apple's stock higher. I think a simple purchase of Netflix (NFLX) for $15 billion and a nice boost to the dividend that would have the stock yield 4% for the moment would certainly do the trick. We want growth from stocks, not financial engineering, and Einhorn's preferred plan is the essence of financial engineering. My plan gives it 27 million customers and a leg up on any serious iTV initiative.
But it's not just Einhorn. Bill Ackman's decision to run Herbalife (HLF) into the ground to make his numbers for his partners smacks of what happens when hedge funds get so big that they can target companies.
Or how about the targeting of the Argentinian government by hedge funds seeking to get redress for a 2001 default on that nation's sovereign bonds?
Now, I am not against constructive activist investment. Nelson Peltz's firm helped Heinz (HNZ) make some tough decisions that succeeded in making that firm more profitable. The company told me that on "Mad Money." Both Aubrey McClendon, the former CEO of Chesapeake, and Irwin Simon, the current CEO .of Hain Celestial, praised Carl Icahn for his ideas and support.
No doubt Dan Loeb's played a constructive role in turning around Yahoo! (YHOO).
But at times, the desire to make the numbers for these huge pools requires their managers to make outrageous claims and demands on management. You could argue that Tim Cook, the current CEO, might be goaded into doing something with the company's bountiful cash hoard when the company meets with shareholders tomorrow. But doesn't Apple deserve some benefit of the doubt given how much it has made for people over the years? Why can't Einhorn just accept Apple for what it is, an amazing company that's done a fabulous job, rather than lambaste it as a ne'er-do-well that doesn't care about its stock performance? What's the matter with just selling the darned stock and admitting that you got it right for a long time but then failed to sell some at the top?
Why can't the hedge funds suing Argentina recognize that took a risk and failed? Don't you think that any large hedge fund that targets a company vocally, as Ackman's doing, couldn't crush a firm's business in its own right? Can't he annihilate any current shareholders and drive off potential buyers with his fierce warnings about what he has in the hopper? I have to admit that I am at a loss why Herbalife just doesn't sue Ackman for tortious interference of its business. But Ackman's not the government. Is it really up to him to bring down a company, even if the company's playing by what may be rules he doesn't care for?
We are in a new era, where big funds try to make themselves right rather than just accepting the risk and the realities. I am not saying they shouldn't be able to do that. I am not saying that they represent a threat to the country and therefore shouldn't allow to be as big as they are. I am simply questioning the egomaniacal behavior of the managers behind them and their righteous indignation that really masks a simple desire to make more money on what might turn out to be losing positions. I'm with Lipton. This isn't democracy. It's big hedge-fund-manager performance anxiety. And, like Lipton, I've had enough of it, too.