DOES

HEDGE FUND ACTIVISM FACILITATE MORE EFFICIENT CAPEX REALLOCATION?

Magdalena Smith Magdalene College The Cambridge Judge School of Business EMBA Independent Project March 2013
In 2007 there were over 75 hedge funds in the US alone that were dedicated to an event driven activist-style of investing. Together they managed more than $50 billion in assets. Since that time hedge funds with this type of investing style have rapidly been growing across Europe, Asia, South America and Australia. In the period of 2007 and 2008 alone US companies were confronted with a 30% increase in the number of demands from activist investors. However the knowledge we posses as to what affects these types of investment have on firms is limited. We aim to add to the debate as to whether hedge fund event driven activist-style of investing creates value in the long term by firstly looking at whether hedge funds through their activities facilitate a change to firms CAPEX reallocation between divisions, and secondly at what this does to returns and CFROI. By doing so we are not simply looking at accounting-based measures of operational efficiency, but analyzing the efficiency of capital allocation. If hedge funds were indeed short-term focused one would expect the share price to improve, but no operational improvement. By showing a lack of improvement in CFROI as a result of hedge fund CAPEX reallocation, we are adding an argument to the claim that hedge fund interventions do not create any additional long-term value. * We thank Credit Suisse HOLT, and in particular Bryant Matthews, for providing us
with access to the HOLT database and continues moral support. Furthermore we thank Professor Wei Jiang of Columbia University for sharing her and her teams data on 2001- 2007 Scheduled 13D filings. The author has benefited from discussion with Nicky Ferguson of Cambridge University. A further thank you is especially dedicated to the advice and supervision of Assistant Professor Peter Szilagyi, of Cambridge University.

ABSTRACT

INDEX 1. Introduction 2. Literature Review 2.1 What is meant by hedge fund activism? 2.2 Does hedge fund activism create value? 2.3 Internal Capital Markets 3. Data collection 3.1 Sample of activism cases and peers 3.2 Operating performance measurement 4. Examples of activism 4.1 Rowan Companies 4.1.1 History 4.1.2 Activism 4.2 Temple Inland 4.2.1 History 4.1.2 Activism 5. Methodology 5.1 Capital Resource Allocation 5.2 CFROI and Stock Returns 5.3 Regression Analysis 5.4 Company Characteristics 5.5 Activist Cases 6. Analysis 6.1 Capex Reallocation Findings 6.2 Relationship between DLC and CFROI 6.3 Relationship between DLC and Returns 6.4 Target Characteristics 6.5 Limitations 7. Conclusion 8. Bibliography 9. Appendix

1. INTRODUCTION In 2007 there were over 75 hedge funds in the US alone that were dedicated to an event driven activist-style of investing. Together they managed more than $50 billion in assets. Since that time hedge funds with this type of investing style have rapidly been growing across Europe, Asia, South America and Australia. In the period of 2007 and 2008 alone US companies were confronted with a 30% increase in the number of demands from activist investors 1 . However the knowledge we posses as to what affects these types of investment have on firms is limited. Recent research shows that the share price performance in the immediate period following hedge fund activism announcements produce significant abnormal returns of around 7% for the target firms (Klein and Zur, 2009) (Tirole, 2006) (Clifford, 2007) (Greenwood and Schor, 2009) and (Brav et al., 2008). The same cannot be said for other forms of activism, in the case of large institutional shareholder activism for example Karpoff (2001) and Romano (2001) go on to show that little impact is made on firm performance. Yet the debate as to whether hedge funds through their activism create value over a longer period of time, or whether their interventions only generate value in the short term is still thriving with Clifford (2007), Brav et al., (2008) and Brav, Jiang and Kim (2011) showing some slight improvements to operating performance in the years following intervention. Greenwood and Schor (2009) on the other hand go on to argue that the outperformance that hedge funds generate depends on their success at getting targets firms taken over. This in turn providing a double benefit to the hedge fund by firstly generating a high premium and secondly allowing the hedge fund to exit in cash or stock in a more liquid company, however no further value creation was shown. Others even argue that this short-term outperformance is at the expense of long-term prospects for the firms.
1 Damien Park, CEO of Hedge Fund Solutions, http://www.finalternatives.com/node/3808

In this research we aim to add to the debate as to whether hedge fund event driven activist-style of investing creates value in the long term by firstly looking at whether hedge funds through their activities facilitate a change to firms CAPEX reallocation between divisions, and secondly at what this does to returns and CFROI. By doing so we are not simply looking at accounting-based measures of operational efficiency, but analyzing the efficiency of capital allocation. Looking at the type of objectives and activities that hedge fund activists engage in many of them look to imply that they facilitate changes within target firms that that in can turn lead to internal capital reallocation. These include the following:

Using a measure Guedj, Huang and Sulaeman (2009) call Deviation from Lagged Capital allocation (DLC) and defined as a deviation in fractional capital allocation across business segments relative to a passive benchmark our research looked to see whether companies targeted by hedge fund activism in 2007 did in deed re-allocate more capital between divisions than peer companies not targeted by hedge funds in the same period. Furthermore, we looked at the relationship between DLC and CFROI, and DLC and Returns. If hedge funds are indeed short-term focused one would expect the share price to improve, but no operational improvement. Our results did not show any evidence of hedge funds improving capital allocation efficiency. When investigating the relationship between DLC and CFROI using pooled ordinary least square regressions with a one, two and three

year lagged DLC our findings imply that every $ that target companies reallocated resulted in lower CFROI improvements for each of the three individual years following the reallocation in comparison to peers. By showing a lack of improvement in CFROI as a result of hedge fund CAPEX reallocation, we are seemingly adding an argument to the claim that hedge fund interventions do not create any additional long-term value. Furthermore, taking market conditions of the period 2007-2009 into consideration, which exhibited a pattern of continues reduction in both the number of M&A deals occurring and the value of the completed transactions, may in turn give support to Greenwood and Schors (2009) claim that the outperformance that hedge funds generate depends on their success at getting targets firms taken over. When looking at returns our findings showed that firms targeted by activists also performed worse in terms of annual returns for the period 2007-2011 in comparison to peers, with the average 2007-2011 return for the target sample resulting in 27.49%, while peers were showed returns of 0.74%. This is not to say that we would oppose (Klein and Zur, 2009) (Tirole, 2006) (Clifford, 2007) and (Brav et al., 2008) findings, which claimed that not only did hedge fund activism announcements produce significant abnormal returns of around 7% for the target firms in the short term, but that no reversal was found during the subsequent year. Instead we would argue that during the period of 2007-2011 and the extreme market conditions, company specific risk played a smaller role than systematic risk, leaving our target peer group much more exposed to share price pressure, given their company characteristics. 2. LITERATURE REVIEW This section introduces theoretical research that is relevant to this paper, including research relating to hedge fund activism by looking at what is meant by hedge fund activism and what role they play in creating value for shareholders.

Secondly it will review literature on internal capital market allocation, as this is of great interest when looking into whether hedge funds do in fact facilitate capital redeployment, and if so why they might be more or less successful in doing so than CEOs or internal managers. 2.1 What is meant by hedge fund activism? There is a number of interventions that shareholders have at their disposal if they are dissatisfied with the performance of a firm ranging from shareholders voting with their feet and selling their holdings (Parrino, Sias and Starks, 2003) to forcing through takeovers. Earlier forms of investor activism would perhaps be best explained by Jensen and Rubacks (1983) definition as investors or institutions holding large debt or equity positions in a company and actively participating in its strategic direction. The argument for why this definition would best explain earlier forms of investor activism is because it does not significantly highlight the part of investor activism that not only actively participates in a companys strategic direction, but directly opposes it and its management. Jensen and Rubacks definition might best define the type of activists that Bethel, Liebeskind and Opler (1998) look at including a sample of money managers, banks, pension funds and insurance companies that held larger blocks in firms and would actively work towards asset divestiture and share repurchases, and which are sometimes seen as the closest ancestors to todays hedge fund activists (Brav et al. 2008). Cliffords (2007) further contributes to the definition, by including the potential threat of taking over the target, bringing us closer to the type of activism that we shall be looking at in this paper. So what type of events might such hedge fund activist get involved in? The classification of events as initially stated by hedge funds provided by Greenwood and Schor (2009) and Brav et al. (2008) are very similar. These include: Engagement with Management as a result of the stock being undervalued. Capital Restructuring, including restructuring of debt, recapitalization, dividends or stock buyback etc.

Changes to Business Strategy such as business restructuring and spin offs, operational efficiency and M&A activity. Governance issues, including ousting CEO or Chairman, addressing Board independence and changes to executive compensation structures. Sale of Target Company, either to third party or through a buyout with a significant proportion of the firms being taken private.

It is worth noting that not only do the activist often get involved in more than one type of activity in a given firm, but they also often change their initial plan as they gain further information about the organization and depending on managements response. Hedge funds use a variety of both non-confrontational and confrontational tactics to achieve the objectives stated above, such as; by communicating with boards/managements on a regular basis with the goal of enhancing shareholder value; by seeking board representation without a proxy or confrontation with the existing management/board; by formal share holder proposals, or publicly criticizing the company and demanding change; using threat or launching proxy in order to gain board representation or even by taking control of the company through takeover bids. When hearing of hedge fund activism many assume that most use confrontational tactics to achieve what they want. This would in be the wrong assumption in accordance with Becht et al. (2007). Brav et al. (2008) go on to show that only 13.2% of hedge funds go on to launch a proxy and 4.2% go on to taking the firm over. Be it that there is no formal definition of what constitutes a hedge fund, Partnoy and Thomas (2006) present four characteristics by which hedge funds are generally identified. The four being the following: (1) they are pooled, privately organized investment vehicles; (2) they are administrated by professional investment managers with performance-based compensation structures and significant investments in the fund; (3) they are not widely available to the public; and (4) they operate outside of securities regulation and registration requirements.

For the sake of this paper we will not be looking at by what general means hedge funds operate differently to other investment institutions, but for one aspect the fee structure. The most common fee structure amongst hedge funds involves a 2% fixed annual fee based on assets under management and a 20% performance based fee dependent on the funds annual return. This fee structure will prove to be of significance when later looking at motivational factors in relation to CEOs and line managers in the companys targeted by the hedge funds. When researching hedge fund activism many have chosen to go down the path of looking at mandatory Schedule 13D filings in order to identify cases of activism, these include; Klein and Zur (2009), Tirole (2006), Clifford (2007), Greenwood and Schor (2009) and Brav et al. (2007). This is also the path chosen for this paper. Scheduled 13D reports must be filed with the SEC by any investor exceeding 5% ownership in a publically traded company. This must be done within ten days of the ownership exceeding 5%, but only if the investor intends to influence the management of the firm. The report also requires the investor to identify their reason for acquiring the shares. Exactly how the scheduled 13D filings are used in this paper will be explained in the section on methodology. 2.2 Does hedge fund activism create value? Opinions as to whether hedge funds through their activism create value vary greatly. There are also futher question as to for whom and what type of value they might create. The opinion of the man on the street is more often than not that hedge funds are short termed and only have their own interests at heart (Anabtawi, 2006)(Bainbridge, 2006), which often goes directly against what is in the best long term interest for the company. In contrast to research done on large institutional shareholders activism, which went to show little impact on firm performance (Karpoff, 2001 and Romano, 2001) or improvement in their operations (Wahal, 1996 and Gillan & Starks, 2000), Brav et al. (2008), found that companies targeted by hedge fund activism

showed a share price outperformance of 7% shortly following activist announcements, and that this did not reverse in the year to follow. Similar findings have been shown by Clifford (2007) and Klein and Zur (2007). Target firms were also shown experience a limited increase in operating performance. However, this alone may not be enough to persuade the skeptics as to the value that the hedge fund creates to others but short-term shareholders. There is also a parallel debate, which not only looks at value in terms of share price or firm performance, but includes the role that hedge funds play as a useful tool of corporate governance and as valuable monitoring agents. Majority of such research is focused around issues relating to usage of shareholder proposals and proxy processes. Bebchuk (2005); Harris and Raviv (2008) and Renneboog and Szilagyi, (2009) go on to show that there is indeed a benefit to be gained by hedge fund intervention of this form. While the main arguments against as provided by Woidtke (2002), Anabtawi (2006), Prevost, Rao, and Williams (2008) go on to claim that the proposals that such investors make only enhance their own self-serving goals. Unfortunately, very limited quantitative research has been done as to show explicitly how hedge funds might go about and create value by other means than proposals and proxies. This is mainly due to the limited data that is available through databases such as Compustat and the fact a high proportion of hedge fund targets are taken private resulting in these also being taken off such databases. However, some research has been done on these issues such as for example Greenwood and Schor (2009) arguing that limited if any value is created, as activists are primarily concerned with having the target acquired. Their research however is limited by not looking at the value that may be created in these companies once they have been taken over by a more suitable management. On the other hand, Brav, Jiang and Kim (2011) using plant-level information showed that a typical firm improves its improves its production efficiency within two years of activism. Furthermore by following plants that were sold of after

the entry of the hedge fund activist they also found that efficient capital redeployment is one important channel through which activists can and do create value. This last piece of research may be of most relevance to this paper as it aims to look at capital redeployment by looking at changes to CAPEX and whether this may be a general channel by which activist create value. 2.3 Internal Capital Markets In a McKinsey article (March 2012) Hall, Lovallo and Musters claim that most companies allocate the same proportion of resources to the same business units year after year leading to under-performance. However, companies that had a higher rate of capital redeployment would over a fifteen-year period outperform their peers by some forty percent. Why might this be significant? When talking about capital re-allocation most of us associate this to the billions re-allocated through the capital markets. Guedj, Huang and Sulaeman (2009) showed that for every year over the last twenty-five years US capital markets have issued about $85 billion of equity and $536 billion in corporate debt. However, during the same period the amount allocated or re- allocated within multi-business companies was approximately $640 billion per year. Furthermore, they find that when looking at conglomerates that firms that actively change their capital allocation across industries have a lower average industry-adjusted profitability than firms that follow passive strategies. This is due to the inefficiency with which this type of re-deployment is done. Although such efficiency has been questioned for a considerable amount of time (Alchian 1969 and Williamson 1975), not all research would claim that internal capital re-allocation tends to destroy value. Williamson (1975), Stein (1997, 2002) arguing that in a well functioning internal capital market more active allocation may in fact create value.

However, a lot of the literature looks at whether such a well functioning internal capital market is in fact possible. What may stand in its way are the power struggles within a firm and personal incentives that CEOs and division managers may hold (Rajan, Servaes and Zingales, 2000), (Wulf, 2008), (Ozbas, 2005). In his 2002 publication Stein looks at the type of information that might be available to decision makers and divides these into soft and hard information. Soft information being information that cannot be directly verified by anyone other than the agent who produces it, while hard information being verifiable information. CEOs mainly have hard information at their disposal to underpin their decisions. Although it is most likely true that CEOs have more access to information relating to the prospects of internal business opportunities than outside investors, they seem to possess less than their divisional managers due to the lack of soft information. If hedge funds did in fact facilitate more efficient Capex reallocation it would be interesting to see how this was done and how it overcame the hard/soft information problem. 3. DATA COLLECTION 3.1 Sample of activism cases and peers Our sample of activism cases first resulted from a large collected data set from 2001-2007 2 based on Schedule 13D filings. These are mandatory filings in accordance with Section 13(d) of the 1934 exchange act and which states that all investors must file with the SEC within ten days of acquiring a 5% stake, or above, in a publicly listed company provided that they have intentions of influencing the management of the company. Investors are also required to state their given objective for buying the stake as part of the filing. The sample included 236 hedge fund activists and 990 independent activist cases for the period 2001-2007. There can be no doubt that we are missing some significant hedge fund activism activity by only focusing on Scheduled 13D filings in our research. Apart from hedge funds that sit under the 5% ownership threshold we are also missing
2 As kindly shared with us by Brav, Jiang, Patrnoy and Thomas

cash-settled derivative transactions, which are known as swap agreements and situations where activist are teaming up with other investors to reach their objectives. In the case of swap agreements the activist investor enters into a multifaceted swap arrangement with an investment back (may even involve several) whereby the bank buys shares on behalf of the investor. However full ownership is not transferred. Instead the activist agrees to repurchase the shares from the bank at and agreed time and price. It is not until this point of ownership transfer that the hedge fund needs to disclose their position to the SEC3. Investors teaming up is an alternative approach that is increasingly growing in popularity. Here we see activists co-operating with not only other activist investors, but also with private equity groups as well as wealthy individuals who may own a large stake in a company. Together they work towards offering buyouts or other initiatives. However, such data is extremely hard to obtain. Hence, using Compustat we identified all US listed companies in the above sample that provided segment CAPEX data for a minimal of two divisions4 for each of years throughout the period fiscal years 2006-2011 inclusive. This period was chosen due to the limited segment data published in Compustat pre 2006 that continue throughout our given period, given that providing segment data is voluntary.5 Focusing on activism that had been announced in 2007 the above figures provided us one year of clean data to identify CAPEX re-allocation patterns within the firms, prior to hedge fund intervention. It also provided us with data four years after announcement to see any development in CAPEX re-allocation within the target firms, changes to share prices and changes to target firms CFROI. Our final sample group of target companies being restricted to 31
3 Damien Park, CEO of Hedge Fund Solutions, http://www.finalternatives.com/node/3808 4 Those divisions being the same divisions throughout the period 2006-2011 5 In accordance with SFAS 131 as issued by FSAB in 1997

 available.

companies of the 225 hedge fund announcements in 2007 due to the limited data

There is a clear bias in this sample towards smaller companies, with only one of the targets Sprint Nextel Corp, having a market cap big enough to be included in the S&P 500. The median market cap of the sample group being $892.25 million, which is comparable to the Russell 2000 small companies index having a market cap mean of $787 million.6 A peer group was identified for the target company sample group by matching firms of similar size and two-digit SIC codes using Capital IQ. Again we ensured that these companies had the same required segment CAPEX data available as the target sample. This was followed by a manual search in SECs database EDGAR to ensure that the peer companies were not themselves targets of activism at any point during the period 2006-2011, resulting in a peer group of 95 companies. 3.2 Operating performance measurement For our operating performance measurement for both target and peer sample groups we used CFROI from Credit Suisse HOLTs database. CFROI cash flow based return metric is a competing metric to EVA. It's main difference to EVA is that it is in the form of an internal rate of return. HOLT has a proprietary methodology that converts income statement and balance sheet information into an annual CFROI. The key components of a CFROI are Gross Cash Flow, Gross Investment and asset life. The Gross Cash Flow is an inflation adjusted measure of the cash flow to debt and equity capital owners. The Gross Investment is the current value of the assets. By comparing these two over the life of the assets and recognizing the final realizable value of the non-depreciating assets an IRR can be calculated. There are important adjustments from accounting to CFROI, such as capitalizing leases and R&D expenditures. Consequently, CFROI has much better explanatory
6 Source: Bloomberg

power than ROE. The US database goes back to the 1950s and since that time the average CFROI has been 6% real. The measurement is available as a long-term time series for firms and is directly comparable across time and across companies regardless of their sector or geography. 4.0 EXAMPLES OF ACTIVISM In this section we present two cases of hedge fund activism showing what may actually occur in these circumstances, looking at both how the activists operate and how target companies respond. The cases presented are those of Rowan Companies vs. Steel Partners, and Temple Inland vs. Icahn. 4.1 Rowan Companies 4.1.1 History Arch and Charlie Rowan founded the rowan drilling company in 1923 with one land-based steam rig. In 1954 Rowan was the first company to do perform a platform mounted deep water drilling operation. Rowan Companies (RDC) went public in 1967 and in 1970 began jack-up rig drilling7. In 1978 RDC fended off a hostile take-over, which may have still been in the corporate memory as this story unfolded. By 2004 Rowans primary business was the leasing of offshore jack up rigs, producing 60% of their revenues. At this time the company owned 20 Jack-up rigs, which accounted for around 11% market share of the 187 rigs in the total marketplace8. They had a reputation for high quality assets. Rowans fleet expansion had begun in 1995 after acquiring the company that had designed and built all their rigs: Marathon LeTourneau. LeTourneau was vertically integrated, having a mini-steel mill. Apart from building jack-ups it also built heavy equipment for the mining and forestry market9. Through 2004 RDC also had an aviation business, Era aviation, possessing a fleet of more than 100 helicopters and fixed wing aircraft servicing the industry. These assets were sold for cash at the end of 200410.
7 Source: www.rowancompanies.com 8 Source: Bernstein research Feb 9, 2004 9 Source: www.rowancompanies.com 10 Source: 2004 10K filing

Furthermore, RDC also operated six towboats under lease agreements during 2000-2005 that were to be sold or terminated during the end of that period11. Rowan does not have a great CFROI history, it is clearly very cyclical and until 2005 it had only achieved a return above its cost of capital in 199712 while consistently incurring net losses that totaled more tan 360m during the period 1985-199513. The boom in energy market in the period 2005-2008 produced significant excess returns peaking close to 11% but this soon faded away.14 Over the twelve months ending June 2007 RDC had lagged the OSX Philadelphia Stock exchange oil service sector by 22%15. A Credit Suisse report on the company, published 14 June 2007 entitled Whats LeTourneau worth? stated that LeTourneau was worth $1.2-1.3bn and with RDC having an enterprise value of $4.7bn at $39 per share, perhaps this was enough to attract Steel Partners interest. 4.1.2 Activism So it was in July 2007 that Warren Lichtensteins Steel partners disclosed a 5.5% stake in RDC (6,121,827 shares) making it the largest shareholder. It did not make any specific disclosures on its intentions in the 13D filing16. In a shareholder letter at the time Steel Partners stated that: When trying to identify an undervalued company or security we usually look for companies with inefficient capital structures, companies that have allocated capital poorly, or companies that can use operational improvements. ...our real home run of long term sustainable returns comes from the implementation of operational excellence that can change a culture and transform a company into a world class company with competitive advantages and high return on invested capital. In their September 2007 letter to investors, Steel partners had a small section on Rowan. It said that it began buying shares in April 2007 and owned a 6.6%
11 Source: 2006 10K filing 12 Source: Credit Suisse Holt Database

13 As per the 2004 10K 14 Source: Credit Suisse Holt Database 15 Source: Bloomberg 16 Edgar

stake. It pointed out that despite the volatile history and limited visibility of the business that emerging market demand was resulting in record price increases. They ended by stating: The drilling business generates significant free cash flow, currently at 50% EBITA margins and the manufacturing business is expected to report record results in the 3rd quarter of 2007. With net debt of $128m, EBITDA of $648m, increased visibility in revenues and backlog demand for its rig component parts Rowan is an attractive risk/reward investment which we value at a significant premium to market. The same letter included a comment on another driller they owned namely, Pride International. Pride had made recent asset sales and focused on deep- water drilling. The letter hinted at the need for consolidation. Steel partners stated at the end ...the underlying value in pride has yet to be realized now as it is more of a pure play offshore drilling company. On 8 January, 2008 Steel partners filed a Notice of intention to nominate director candidates at the RDCs companys 2008 AGM17. Management responded to this in an 8K filing on 8 January 2008. Daniel McNease, Chairman and CEO stated: "We have always maintained an open dialogue with all of our stockholders and have listened to the views expressed by Steel Partners in our conversations with them. We are prepared to have a continuing and constructive dialogue with Steel Partners. The Board of Directors regularly reviews the value inherent in the Company's business plan, and will continue to do so in a decisive and measured way. While a lengthy and disruptive proxy contest is not a preferable course of action, the Company is prepared to do everything necessary to protect the interests of stockholders consistent with our goal of delivering high performance and long-term stockholder value." In the 2008 April letter to Steel partner investors it was mentioned that there had been continuous discussions with Danny McNease, CEO of Rowan the resulting in the prevention of an election contest on the back of an agreement, which was reached on 30 March 2008. In return for the withdrawal Rowan agreed to monetize Letourneau (LTI) by the end of the year. If this would not
17 SEC Edgar database

happen then Steel partners would get a director on the board. It was also states that if LTI was monetized through an IPO then a $400m share buy-back would occur. On the day the agreement was announced Rowan shares moved up 8%. The next Steel Partners investor letters was in September 2008. At this time Steel partners owned a 9.45% stake. Since our negotiated settlement with Rowan in the first quarter of 2008, the Company has announced its intention to sell or spin-off its wholly owned manufacturing subsidiary, Letourneau technologies, Inc. (LTI) and to repurchase $400m of stock. The Company has reported strong interest from several potential strategic buyers and they expect to announce a definitive deal in the coming weeks. Then the letter comments that despite oil being up 56% since they took their stake the stock has sold off aggressively back to where they purchased it despite a fundamentally improved business model. The section ends by commenting that they continue to work with management to unlock value. Continuing to follow this story by Steel Partners letters brings us to March 2009 in the midst of the financial crisis. Steel Partners is suffering redemptions, and gated the fund in December to stabilize it. Steel Partners now declares an 8.7% stake in Rowan, presumably down due to redemptions. On this occasion they state that We initially invested in Rowan, in part, because we believed the sale, spin off, or other monetization of LTI would unlock significant value. Due to the crisis Rowan was unable to complete its side of the bargain and Steel partners placed John Quicke onto the board, soon to be followed by Larry Ruisi at the May shareholder meeting. In further communication with investors Steel Partners state: We were successful in convincing the company to cancel or postpone additional capital expenditure and they have agreed to limit the number of new rigs they are building (cancelling one and deferring two others) as the demand side of the equation has been greatly reduced. This followed a surprise announcement by Rowan in November 2007 of six additional new build rigs despite concerns of global oversupply (there were 80

jack-ups under construction). The order was for $1.1bn and added $645m to the backlog of LTI with an estimated 15% saving versus outsourcing18. Furthermore, Steel Partners had been successful in getting Rowan to adopt lean practice utilizing the Steel Partners Lean methodology19. Danny Mcnease, the CEO had retired at the end of 2008 and now steel Partners was dealing with W. Matt Ralls, who was COO at GloablSantaFe Corp. On 15 July, 2009 Steel partners disclosed that its stake had been reduced to 3.8%. The agreement that got Lawrence Ruisi onto the board stipulated a minimum stake of 5%. Ruisi quit the board Jumping ahead to March 2010, Steel Partners has restructured into a holding company. Rowan only gets mentioned in a section saying its stake has been reduced. The sale or spin of LTI was still on the cards. W. Matt Ralls in the 2011 shareholder letter said that it expected 2011 to offer suitable conditions to begin the process. Later that year the company realized $1bn from the sale of its manufacturing operations (quite a lot less than Steel partners had estimated) and it also sold its onshore drilling operations for $513m. John Quicke remains on the board. See Appendix for HOLT chart 4.2 Temple Inland case study 4.2.1 History Both Temple and Inland have long histories, but Temple and Inland were put together inside Time Inc. (TIN) in 1978 and then spun off in 1983 as Temple Inland Inc. The combined firms created a conglomerate that offered financial services, banking services, included a real estate portfolio but also operated a packaging and forest products segment20. In the mid-1990's, though, Mr Temple stepped down from his duties on the board of directors, and I think we all realized that something big had changed. Like a boat that loses its anchor, the culture of the company began to drift, to
18 Source: David Smith, JPMorgan (2/11/07) 19 Steel Partners letter to investors Nov 2008 20 Source: Temple Inland website

change into one that placed less emphasis on the long-term sustainability of the company and more emphasis on quarterly, and then monthly, profits and loss. The culture changed slowly from familial competitive to corporate competitive, and there was a difference21. 4.2.2 Activism Activist involvement in Temple Inland actually dates back to the start of the decade when in March 2000 LENS Investment Management made a filing pushing for TIN to spin-off its banking and financial services division which it claimed would improve its transparency and accountability22. As a sign of the change at TIN they announced in 2003 Project TIP the Transformation, Innovation and Performance initiative is rolled out to improve organizational effectiveness, reduce costs and streamline corporate functions.23 A few years later, in February 2005, Icahn who had built a 2% stake threatened to nominate directors in a proxy battle but nothing happened24. Posted on the temple Inland website in 2006 was: "Our technology-driven, low-cost systems keep our plants operating in the lowest cost quartile, delivering a 37% ROI for 2006." Two years after announcing his 2% stake, Icahn increased his stake through the 5% threshold and therefore appeared on our activist list for 2007 with a 13D filing as at 22/01/2007 and a stake of 6.7% 25. On this disclosure the stock jumped 8% to $4526. In the 'Purpose of Transaction' section of the 13D filing Icahn stated:

21 Source: Change is in the air... and on the ground for Temple Inland by Chuck Ray,

http://gowood.blogspot.co.uk/2012/03/
22 Source: Bloomberg Business week February 26, 2007 23 Source: Temple Inland 2003 Annual Report. 24 Source: Bloomberg Business week February 26, 2007 25 Source: Bloomberg Business week February 26, 2007 26 'Icahn's bad bet' by Herb Greenberg, WSJ 8th Nov 2007.

"The Reporting Persons acquired their positions in the Shares in the belief that they were undervalued due to, among other things, the conglomerate structure of the Issuer in which various disparate and non-complementary businesses are combined under one corporate umbrella. The Reporting Persons believe that this structure obfuscates the true value of the Issuer's assets and note that various analysts have issued sum of the parts analyses that imply a value for the Shares that is significantly higher than their current market price. The Reporting Persons intend to seek to have conversations with members of the Issuer's management to discuss ideas that management and the Reporting Persons may have to enhance shareholder value, which may include, among other things, the divestiture or spin- off of one or more of the Issuer's component businesses (which may include Guaranty Bank, the corrugated packaging business, timberland holdings, the building products business and/or the real estate division). The Reporting Persons may consider engaging in a proxy contest to attempt to replace one or more members of the Issuer's staggered board of directors with persons nominated by the Reporting Persons, but have as yet made no definite decision to do so." From the 2006 10K one can see the significance of the financial services operations:

In the previous three years capital expenditure had been fairly stable ($221m, $222m, $208m) although 2006 did include a fairly sizeable acquisition in January of $196m for Standard Gypsum. The company disclosed divisional assets and in the 2005/6 period assets had increased in Real Estate and Financial services by $41m and $90m respectively to $422m and $1,017m. The reported GAAP assets in the Forest and the Corrugated divisions were shrunk by $53m

and $141m to $866m and $2,318m respectively. It would appear that the real estate and mortgage boom was seducing management to grow these businesses27. Icahns 13D filing was quickly followed up by announcing on Friday 16 February, that he would nominate four directors to the board at the AGM28. It didnt take long for the management to respond, as on 26 February, 2007 TIN said that it would split into three public companies (retaining manufacturing and spinning financial services and real estate) committing to sell its timberland operations by the end of the year. According to S&P the spin-off businesses account for 24% of sales and 33% of historic EBIT. The shares moved up 13% on the news and closed around $6329. Icahn bought his shares in the range of $39 to $4730. At this point Icahn dropped his proxy threat. He was quoted saying "Temple-Inland's management and board of directors should be commended for listening to the concerns that we and other shareholders have expressed and for announcing plans to take the actions we suggested". The stock reached a high of $65 in July31 and then as the credit crisis emerged the real estate and lending businesses came under pressure. On 10th September Icahn announced his ownership of 9.4m shares, an 8.65% stake resulting in the shares moving up 4% to $55.6. On the 3rd of October Icahn again announced an increase. This time his position had increased from 8.8% from 8.65%, sending the shares 6% higher. In the filing Icahn declared he had used derivatives with no voting power to gain an exposure of 5m shares.
27 Source: 2006 annual report 28 Source: 13D tracker 31/1/07 29 Source: Bloomberg Business week February 26, 2007 30 Source: www.bloggingstocks.com February 26, 2007 31 Source: Bloomberg

The timberland assets of 1.55m acres were sold in October for $2.38bn, the proceeds in loan notes due 2027. Proceeds were expected to be $1.8bn and TIN would pay a special dividend of $10.25 per share or $1.1bn and the remaining cash used to pay down debt32. And yet, the stock soon fell back to $45 on Friday 16 November 2007, the same price as after the 13D filing in January. Temple-Inland completed the spin-off of its Guaranty Financial (GFG) and Forestar (FOR) real estate units on 31 December. TIN closed the year just under $30 and after the spin ownership of one share of TIN including the spun companies was worth around $3233. Icahn continued to use options and reported on 15 February 2008 that he had approximately a 9.77% stake. By his Q4 2008 13F filing Icahn had sold out completely of temple Inland but remained owning the spin companies. Icahn owned close to 10% of the spun-out Guaranty Financial trading at $12 per share which ended badly as Guaranty declared bankruptcy in the summer of 2009, just fifteen months after the spin off. At the time it was the tenth biggest bank bankruptcy in US history34. It is not clear whether Icahn made any money from his investment in Temple Inland. Forestar (FOR) has been more successful, although it has underperformed the market as its CFROI has fallen from 6.5% in 2007 to 3.6% in 2011. Today it has a share price of $22, a market capitalisation of $720m and expectations that CFROI has troughed and the shares have started outperforming recently35. The final chapter for Temple Inland story was entered as of the 6th June, 2011 when International paper (IP) made an offer of $3.3bn for TIN. The shares jumped 42% on the open and International Paper rose 4%.
32 Source: 2007 annual report 33 Source: WSJ 3/1/2008, Seeking alpha, by Herb Greenberg 34 Source: A Time-Ripened Tale of Toxic Assets, a Corporate Spin-Out & a Failed Bank, Nov. 14,

2011 by K. LaCroix, www.dandodiary.com

35 Source: Credit Suisse Holt Database

A deal was finally settled in September with a final offer in the order of $3.7bn including a $105m break clause. At the point of sale there was no on going hedge fund activism in the firm36. See Appendix for HOLT chart 5. METHODOLOGY We are attempting to identify whether hedge fund activists facilitate internal capital reallocation through their interaction with firms and look at what this might do to the targets returns in order to add to the debate on whether hedge funds create value through their intervention. We also look at two examples of hedge fund activity where the initial stated objective included measures effecting capital reallocation in order to see how this might be done. 5.1 Capital resource allocation In order to see if hedge funds do in fact facilitate resource allocation we start by looking at whether firms where hedge funds have openly stated their intention to be active by filling a SEC 13D are more active in their CAPEX reallocation between business segments than firms that are not targeted. We make no assumptions as to whether above or below average reallocation activity provides higher operating efficiency (Guedj, Huang, Sulaeman, 2009) (Harris and Raviv, 1996) (Ozbas, 2005). Neither do we look to identify whether any one explicit form of capital allocation is more efficient than the other (Billett and Mauer, 2003). We aim to identify whether firms targeted by hedge fund activism in 2007 are more or less active in their CAPEX reallocation than their peers for the period running up to 2011. Using CAPEX as a proxy provides us with the most readily available segment data to get a quorate that is available through Compustat. It also allowed us to look across all industries unlike if we were to look to measure improvement on total factory productivity Brav, Jiang and Kim. (2011), which would only allow
36 Source: NY Times 6/9/11, Michael Merced and Jeffrey Cane

analysis of firms that have their own production. Ideally we would have also liked to include an analysis of other forms of resource allocation such as changes to R&D, PPE, human capital and fixed assets. However the lack of segment data would have rendered the sample group unfit for purpose. To measure CAPEX reallocation between divisions we used a capital allocation activeness measure (DLC) 37 showing change in fractional capital allocation across business segments over the period 2006-2011. The formula below shows the activeness of CAPEX allocation by looking at fractional allocation by division against the prior year. A firm is active if it changes relative percentage allocations from year to year.

This is for all divisions i in the set F of divisions of firm f in year t. The resulting DLC is therefore between 0 and 1. The measurement is compared to a passive benchmark of the previous year's allocation. If a company adds a division or removes a division we have left these data points in and count them as active allocation. This is different to the methodology in the paper by Guedj, Huang and Sulaeman (2009). They give an example of a company having divisions A, B and C in year t- 1 and B,C,D in year t. In this case they only include B and C in set F for the calculation of DLCf,t. We have changed the calculation to include A as a zero in year t and D as a zero in t-1. The effect of this is to show this case as active allocation. The reason for
allocation and firm performance amongst conglomerates.
37 As introduced by Guedj, Huang and Sulaeman (2009) when looking at internal capital

doing this is to allow for M&A and spin-offs to be included as resource allocation. The downside of this method is if the company has simply reclassified rather than made an active decision. We have looked at the examples to see where this might be the case and where found we would not count it in the DLC. They also state that in case of no common divisions the DLC is defined missing. In our data set this case does not arise. Such DLC calculations were done for each of the 31 firms involved in hedge fund activism and 95 peers for the period 2007-2011, allowing for 5 data points for each of the targets and peers. 5.2 CFROI and Stock Returns To identify the extent to which a firm creates value through their decisions related to capital allocation we looked at year-end CFROI as our operating performance measurement, and year-end Stock Returns for all target firms and peers alike throughout the period 2006-2011. We gathered the CFROI data using Credit Suisse HOLTs database and the stock returns using closing share price data from Bloomberg. The key components of a CFROI are Gross Cash Flow, Gross Investment and asset life. Given the lack of such information on a segment basis the CFROI can only be calculated on a company level. Combining all of the data above provided 499 observations for each variable to be included in further analysis. 5.3 Regression Analysis In order to formally investigate the relationship between firstly, DLC and CFROI and secondly, between DLC and returns, I use pooled ordinary least squares regressions. The first using CFROI as a scalar dependent variable and the DLC as an explanatory variable, and the second using Returns as a scalar dependent

variable and DLC as an explanatory variable. Furthermore a one year, two year and three year lagged DLC was incorporated to predict CFROI, as one would not expect an effect on CFROI in the year of the intervention. The same lag effect was added to returns in order to see if changes to internal capital allocation may have been discounted in the share price prior to the actual effect on the CFROI. Time fixed effects were included in the regression specification to control for time varying aspects of the variation in the independent variable not associated with changes in DLC due to activism or otherwise. This being of particular significance given the turmoil in 2007-08 leading to $8 trillion of US stock market wealth being lost between October 2007 when the market was at and all time high and October 200838. As importantly, the US M&A market has had a very rough ride during the observed period with the value of M&A deals coming down from a $500bn high in Q2 2007 to $100bn in Q3 2009. During the same period the number of M&A deals went down from just under 3000 deals in Q2 2007 to 1700 deals in Q1 2009. Since then the stock market and the number of deals have returned to their earlier highs, but the value of the deals in Q4 2012 had still not reached above $300bn39. This could have especially affected hedge fund activists if Greenwood and Schor (2009) are accurate in claiming that hedge fund returns are largely explained by the ability of the activist to force target firms into a take over. A dummy identification variable is included in the regression specification, which is equal to one if the firm was targeted by a hedge fund, and equal to zero if the firm was not targeted by a hedge fund. This variable controls for any difference is performance measure between the target and peer firms not due to changes in DLC.

38 Brunnermeier, 2009 39 M&A and stock market performance data as collected from Bloomberg.

Interaction terms are also added to the regression specification by multiplying the DLC variables and the target firm dummy variable in order to isolate the effect of DLC over and above peers. y!" = b! DLC!" + b! DLC!"!! + b! DLC!"!! + b! DLC!"!! + b! DLC!"!! + b! TD!" + b! TD DLC!" + b! TD DLC!"!! + b! TD DLC!"!! + b!" TD DLC!"!! + b!! TD DLC!"!! + v! + !" Where yit is either the CFROI or annual stock returns of firm i at time t. TD is the target dummy variable. v! are the time fixed effects and !" is the residual. 5.4 Company Characteristics Characteristics of the target firms and peers respectively are also independently taken into consideration and the analysis includes looking at averages and medians of DLC, market caps, debt leverage, CFROI, Returns and Price/Sales ratios. A Welsh t-test was further performed on the DLC averages and medians, which unlike the Students t-test is not based on a pooled variance estimate. 5.5 Activist cases The report also includes the description of three activist cases and follow activity from when the hedge fund makes their activist intentions public and through their period of varying intervention. The information for these cases was collected using Factiva, Bloomberg and Holt.

 6. ANALYSIS

As presented in section 1 there is a variety of situations in which hedge funds dedicated to an event driven activist-style of investing find themselves, which could lead to CAPEX reallocation (Table 1.). This being the case, our paper sets out to investigate whether companies targeted by hedge fund activism do reallocate CAPEX differently, and whether they see any benefit in profitability or shareholder returns as a result of this activist engagement.

Table 1. 6.1 CAPEX reallocation findings Bearing in mind the aim presented above, we firstly look at whether hedge fund event driven activist-style of investing creates value in the long term by focusing on whether hedge funds through their activities facilitate a change to firms CAPEX reallocation between divisions. Using a measure Guedj, Huang and Sulaeman (2009) call Deviation from Lagged Capital allocation (DLC) and defined as a deviation in fractional capital allocation across business segments relative to a passive benchmark our research looked to see whether companies targeted by hedge fund activism in 2007 did in deed re-allocate more capital between divisions than companies not targeted by hedge funds in the same period. When looking at a sample of 31 targeted firms and some 95 peers our DLC measures showed that the targeted firms re-allocated less capital than their non-

targeted peers for each of the years 2007 through to an including 2011. This was particularly statistically significant at the 1% level for the years 2008 through 2010 during which time the target firms re-allocated on average 9-10% less across divisions (Table 2).

Table 2. Furthermore we went on to divide the target companies and peers into active, neutral and passive groups by dividing average DLC for each company and sorting into the three groups mentioned above with the highest third of DLC coming into the active group etc. (Table 3.)40. This data shows slightly better CFROI performance from targets, but worse returns although these differences were not statistically significant when using a Welch t-test. Thereby, we can neither confirm nor deny Guedj, Huang and Sulaeman (2009) argument that higher allocation leads to lower returns.

Table 3. (The data was divided into 1/3 active, neutral and passive as defined by average DLC over 2007-2011. The highest being the most active CFROI changes. CFROI Change is calculated as CFROI 2011- CFROI 2007. Capex/07 shows the sum of Firm Capex made 2008-2011 divided by 2007 Firm Capex. Hence using 2007 Capex as a base year, above 4 shows Capex increased on average, and vice versa.)

40 The concept for table two came from Guedj, Huang and Sulaeman (2009)

6.2 Relationship between DLC and CFROI For the second part of our investigation we were looking to analyze the relationship between hedge fund activists reallocation of CAPEX and its effect on CFROI. When investigating the relationship between DLC and CFROI using pooled ordinary least square regressions with a one, two and three year lagged DLC our findings imply that every $ that the target company reallocated resulted in lower CFROI improvements for each of the three individual years following the reallocation in comparison to peers (Table 4.). However, the differences were statistically insignificant for all but the first year after reallocation. What is clear is, that we have not shown an improvement in CFROI as a result of hedge fund CAPEX reallocation, seemingly adding an argument to the claim that hedge fund interventions do not create any additional long-term value. We cannot however go on to claim that they destroy long-term value due to the statistical insignificance of our findings.

Table 4. Our findings further show that the target sample has lower average and median annual improvements to CFROI than peers for all but one of the individual years, as well as throughout the entire period lasting 2007 to 2011 (Table 5.). This would go against the findings of Clifford (2007), Brav et al., (2008) and Brav, Jiang and Kim (2011) all showing some slight improvements to operating performance in the years following intervention in comparison to peers.

Table 5.

In Brav et al, (2008) they find the average holding period for hedge fund activists to be 22 months after using form 13F holdings data from Thomson Financial. For our sample that would imply that the hedge funds were becoming active in the companies in 2007 and exiting late 2008 to late 2009. This overlaps with the period of credit crisis in which share prices saw their low points41. When looking at market conditions during these years and the amount of M&A activity in the US42 we note that M&A activity was consistently going down throughout the period starting in Q2 2007, hitting a low in Q2 2009 and only starting to recover slightly in Q3 2009 both in terms of number of deals and the value of the completed transactions. This may in turn give support to Greenwood and Schors (2009) claim that the outperformance that hedge funds generate depends on their success at getting target firms taken over. During this period that would have proven significantly harder, as reflected in a total lack of relative improvement in CFROI. 6.3 Relationship between DLC and Returns. When analyzing the relationship between DLC and Returns the same lag effect was added to returns as to the CFROI regression in order to see if changes to internal capital allocation may have been discounted in the share price prior to the actual effect on the CFROI. Again, we found very little evidence to support any statistically significant increase in returns as a result of changes to DLC. However there were slight signs of the target group starting to perform better than peers as a result of DLC changes two and three years after the actual change had been implemented (Table 6.).

41 Source: Bloomberg 42 Chart 1 and 2 in the appendix.

Table 6. Furthermore when looking at annual returns (Table 7.) we see that the average year on year returns were worse for target firms in 2007 and 2008 both in terms of averages and medians. However in 2009 target firms showed a stronger average annual return of 128.69% versus the peers 60.81% and a median annual return of 65.52% for target companies and 39.70% for peers. Targeted firms also performed better in 2010 than peers on an average basis. This would likely have occurred as a result of the characteristics of the firms in which hedge funds were active at the time and the extreme market conditions during the period.

Table 7. 6.4 Target Characteristics As can be seen in chart 3 in the appendix, our targets have lower average market capitalization than the peers and their market capitalization has a significant skew towards smaller companies as shown by the medians. It also has a lower average dividend yield with the same skew as noted by the median company, which pays no dividend. Finally, the target group displays a value bias as shown by significantly lower price to book ratio. The above three factors, as exhibited by our target sample relative to peers, go far in explaining why our target sample group had such poor returns in 2008 and 2011, while recovering in 2009.

Running up to the credit crisis of 2007, stock volatility and correlations were unusually low43, which would have created a beneficial environment for stock picking. That environment abruptly changed with the start of the credit crisis towards the autumn of 2007. This resulted in correlations and volatility reaching levels not seen since the 1930s44, a similar spike in volatility and correlations was once again witnessed in 2011. $8 trillion of U.S. stock market wealth was lost between October 2007, when the stock market reached an all time high, and October 2008 alone. Company specific risk would have played a smaller role in these extreme types of markets than systematic risk, leaving our target peer group much more exposed to share price pressure, given their company characteristics. 6.5 Limitations There can be no doubt that the most influential limitations to our research result from lack of segment data, as provided by Compustat and other similar databases. As a result we were not able to substantiate our argument by using further data such as segment sales, operating margins and assets, for these were not available for enough companies within our target sample group. In order to see if such data would show significantly different result from those that we found, we used the Columbia Schedule 13D data going back to 2001, matching these cases against the Credit Suisse HOLT database. We matched 51 cases with divisional data (be it not divisional CAPEX data). In order to analyse these cases we also produced a random peer set of companies with divisional data matching the data with the year of activist engagement. We used the divisional data and looked at operating margin, return on assets, asset turns, capex/sales and for the parent company cash/assets and CFROI. The table below shows the medians from the data on the 51 activist cases and the 51matched random sample of peers.
43 Source: Bloomberg 44 Brunnermeier, 2008

Source: Holt Database

From this it can be seen that the activist targets have higher margins, lower turns and higher return on assets at the segment level. However, at the consolidated parent level the activist firms have lower CFROI, hence showing no improvement to the firm. There appears to be little difference in cash held on the balance sheet between the two groups that would distort the CFROI analysis. There does appear to be some evidence that the two-year change in divisional Return on Assets is stronger for the activist group but this does not show up in CFROI improvements. Therefore, it is difficult to draw any conclusions from this data. Further work in this area would be beneficial, including statistical significance tests. An additional limitation is the lack of segment data pre-dating 2006. For our research this meant that we could not look at CAPEX patterns of the target firm pre hedge fund engagement. 7. CONCLUSION We aimed to add to the debate as to whether hedge fund event driven activist- style of investing creates value in the long term by firstly looking at whether hedge funds through their activities facilitate a change to firms CAPEX reallocation between divisions, and secondly at what this does to returns and CFROI. By doing so we were not simply looking at accounting-based measures of operational efficiency, but analyzing the efficiency of capital allocation.

Our findings showed a lack of improvement in CFROI as a result of hedge fund CAPEX reallocation, thereby adding an argument to the claim that hedge fund interventions do not create any additional long-term value. However, when looking at the case samples it is clear that not all activists have the same modus operandi nor objectives. As such it would be interesting to see future research looking at these differences when analyzing improved allocation efficiency.

 BIBLIOGRAPHY

1. Alchian, A., 1969, Economic Policy and the Regulation of Corporate Securities. Chap. Corporate Management and Property Rights, Washington, DC: American Enterprise Institute. 2. Anabtawi, I., 2006, Some skepticism about increasing shareholder power. UCLA Law Review 53, 561-600. 3. Bainbridge, S.M., 2006, Director primacy and shareholder disempowerment. Harvard Law Review 119, 1735-1758. 4. Bebchuk, L.A., 2005, The case for increasing shareholder power. Harvard Law Review 118, 835-914. 5. Becht, Marco, Julian Franks, Colin Mayer, and Stefano Rossi, 2006, Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund, ECGI Working Paper. 6. Bethel, J.E., Liebeskind, J.P., Opler, T., 1998, Block Share Purchases and Corporate Performance. The Journal of Finance 53, 605-634. 7. Brav, Alon. Jiang, Wei., Partnoy, F., Thomas, R., 2008, Hedge fund activism, corporate governance, and firm performance. Journal of Finance 63, 1729-1775. 8. Brav, Alon, Jiang, Wei , and Kim, Hyunseob , 2011, The Real Effects of Hedge Fund Activism: Productivity, Risk, and Product Market Competition. Centre for Economic Studies 12-14. 9. Brunnermeier, Marcus, 2008, Deciphering the 2007/8 Liquidity and Credit Crunch, Journal of Economic Perspectives, forthcoming. 10. Buchanan, B., Yang, T., 2009, A comparative analysis of shareholder activism in the US and UK: Evidence from shareholder proposals. Unpublished working paper. University of Seattle. 11. Clifford, Chris, 2007, Value creation or destruction: Hedge funds as shareholder activists, Workingpaper, Arizona State University. 12. Cziraki, Peter, Renneboog , Luc and Szilagyi, Peter G., 2009, Shareholder Activism through Proxy Proposals: The European Perspective, Unpublished Working Paper, Tilburg University 13. Gillan, Stuart, and Laura Starks, 2007, The evolution of shareholder activism in the United States, Journal of Applied Corporate Finance 19, 5573. 14. Guedj, Ilan., Huang, Jennifer and Sulaeman, Johan., 2009. Internal Capital Allocation and Firm Performance 15. Greenwood, R., Schor, M., 2009, Investor activism and takeovers. Journal of Financial Economics 92, 362-375.

16. Harris, M., Raviv, A., 2008, Control of corporate decisions: shareholders vs. management. Unpublished working paper 620, Center for Research in Security Prices, Chicago, IL. 17. Karpoff, J.M., 2001, The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings. SSRN eLibrary 18. Klein, A., Zur, E., 2009, Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors. Journal of Finance 64, 187-229. 19. Ozbas, O., 2005, Integration, organizational processes, and allocation of resources, The Journal of Financial Economics, 75, 201242. 20. Parrino, R., Sias, R.W., Starks, L.T., 2003, Voting with their feet: institutional ownership changes around forced CEO turnover. Journal of Financial Economics 68, 3- 46. 21. Partnoy, Frank, and Randall Thomas, 2006, Gap filling, hedge funds, and financial innovation, Working paper, Brookings Institution Press 22. Prevost, A. K., Rao, R.P., Williams, M.A., 2008, Labor unions as shareholder activists: Champions or detractors? Unpublished working paper. Ohio University. 23. Rajan, R., H. Servaes, and L. Zingales, 2000, The Cost of Diversity: The Diversification Discount and Inefficient Investment, The Journal of Finance, 55, 35-80. 24. Romano, Roberta, 2001, Less is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance, Yale Journal on Regulation 18, pp. 174- 251. 25. Stein, J. C., 1997, Internal Capital Markets and the Competition for Corporate Resources, The Journal of Finance, 52, 11133. 26. Stein, J. C., 2002, Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms, The Journal of Finance, 57, 18911921. 27. Wahal, S., 1996. Pension fund activism and firm performance. Journal of Financial and Quantitative Analysis 31, 1-23. 28. Williamson, Oliver E., 1975, Markets and Hierarchies: Analysis and Antitrust Implications (Collier Macmillan Publishers, Inc., New York). 29. Woidtke, T., 2002, Agents watching agents?: evidence from pension fund ownership and firm value. Journal of Financial Economics 63, 99-131.

 9. APPENDIX

Chart 1.

Chart 2.

Chart 3