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

Chapter 10

Activists Taking on Large Corporations Must Have Institutional Support

When activist hedge funds have “textbook” short-term outlooks, they will not succeed at their efforts to gain the support of institutions. This is particularly true at larger companies where activists must have the backing of many institutions for their campaigns to be triumphant.

Activist Bill Ackman of hedge fund Pershing Square Capital in January 2006 found that out the hard way. He canceled plans to push McDonald's Corporation into spinning off about two-thirds of its 8,000 company-owned restaurants after he calculated that his proposal wouldn't receive the support of a sufficient number of institutions invested in the burger chain. In a presentation to shareholders at a New York investment conference, Ackman expressed a hope that McDonald's would use the proceeds from the restaurant sales to buy back shares.¹ Generally speaking, institutions try to recognize whether an insurgent's efforts will bring long-term improvements to the company and its stock. At McDonald's, a critical mass of institutional investors didn't believe that Ackman's overall approach would aid the company in its long-term operational success.

Ackman did manage to receive the support of some institutions, but not enough. The sheer size of the company, which has a $60 billion stock market capitalization, meant that for Ackman to succeed a large number of institutions would have had to believe his strategy was good for them, ...