Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World

Chapter 5

Why Activists Target Certain Corporations and Leave Others Alone

Activist investors had many reasons to complain about their investment in embattled coffee roaster Farmer Brothers Company. Its lack of communications with investors was definitely one major issue.

But probably the most important thing Farmer Brothers did to raise the ire of activist shareholders was to sit on a pile of cash and passive short-term investments.

In 2003, disgruntled investors at Farmer Brothers expressed their dismay upon reading that the company reported in Securities and Exchange Commission (SEC) filings that it had almost $300 million in these lackluster short-term securities investments.¹ By the end of 2005, the investment portfolio had dwindled down to $171 million.² Lutin & Company president Gary Lutin estimated at the time that the investments represented roughly 57 percent of Farmer Brothers' assets.

In fact, at one point in 2004, dissident investors even began writing letters to the SEC raising the question about whether the coffee roaster had become an unregistered investment company in violation of the Investment Company Act of 1940.³ Companies with more than 40 percent of their total assets in cash and passive investments, such as securities, must register with the SEC as investment companies. The concern by a large group of activist investors was that Farmer Brothers was not putting its capital to good use.

Having a significant portion of a company's assets in cash and securities, ...