This document provides an introduction and overview of hedge fund activism. It discusses how historically most investors have been passive and outlines some statistics on the growth of the hedge fund industry. The document then discusses the concept of activist hedge funds which take stakes in undervalued companies in order to design plans to improve the company's value and gain influence over decisions. It provides examples of four case studies of activist investments that will be analyzed later in the paper. The introduction concludes by noting the paper aims to examine how activist managers influence company valuation and whether their actions improve situations long term or just impact short term value.

1. UNIVERSITA’ DEGLI STUDI DI PADOVA
DIPARTIMENTO DI SCIENZE ECONOMICHE ED AZIENDALI
“M.FANNO”
CORSO DI LAUREA IN
ECONOMIA E MANAGEMENT
PROVA FINALE
Hedge fund activism: some cases studies
RELATORE:
CH.MO PROF. MICHELE MORETTO
LAUREANDO: DALLA ROSA FILIPPO
MATRICOLA N. 1022041
ANNO ACCADEMICO 2013–2014

2. ABSTRACT
Currently, the majority of investors is passive. Although they own big percentage of shares,
they neither join shareholder meetings or vote resolutions. In other words, even if they have
the possibility of choosing companies’ strategies, they do nothing.
Interviewed by Reuters, Ackman (CEO of Pershing Square) stated: "Capitalism over time has
democratized, which I think it is great for accessibility to the average investor in the market"1
.
Anyway, Preqin underlines that "...activism is becoming a more widely utilized approach and
this is leading to more hedge fund managers seeing viable opportunities for investment in this
area..."2
.
This approach involves a particular stake in the company in which the manager is willing to
invest. The first goal of this kind of investors is to design a plan to improve a company's
value. Consequently, the manager gains a certain degree of influence over the firm and all its
small shareholders. The purpose of this paper, indeed, is to try to show how the biggest
activist managers behave and how they can influence the firm's valuation. I will talk about the
performances and I will try to link this movements to the actions undertaken by the managers.
It would be interesting to understand if these persons really manage to improve the situation
or their actions affect only the short term value.
The single cases, then, give me the chance to analyze the different ways used by managers to
ask for a change. Anyway, we can spot a bottom line.
The first step of each of these new positions (when this is long) is to find a business the
managers consider undervalued. Once they find it, we can highlight different way they use to
shake the company and try to improve its value.
Therefore, after a small introduction on the hedge fund industry and the main investment
strategies, I will present four different past investment positions.
I will use historic price charts as well as the letters issued by the managers and past articles.
1
ACKMAN, B., 2013. Ackman: shorting stocks sees as “un-American”. Reuters, Apr 06. Available at:
http://www.reuters.com/video/2014/06/22/ackman-shorting-stocks-seen-as-un-americ?videoId=242092185
2
PREQIN, 2014. Preqin Special Report: Activist Hedge Funds. P.2

3. ABSTRACT (IN LINGUA ITALIANA)
Ad oggi, la maggior parte degli investitori può definirsi passiva. Sebbene, infatti, questi
detengano importanti quote di una compagnia, non partecipano attivamente alla vita
societaria. In altre parole, nonostante abbiano la possibilità di indirizzare le strategie aziendali,
in concreto assumono comunque un atteggiamento passivo.
Intervistato da Reuters, Ackman (CEO di Pershing Square) affermava: “Il capitalismo, con il
passare del tempo, è diventato più democratico. Penso che questo avvenimento sia un’ottima
cosa per l’accessibilità al mercato dell’investitore medio” 3
.
Comunque, Prequin sottolinea che “...l’attivismo sta diventando un approccio sempre più
utilizzato. Questo sta portando sempre più hedge fund manager ad investire in questo
ambito...” 4
.
Il primo obiettivo di questo tipo di investitori é quello di strutturare un piano per incrementare
il valore della compagnia presa in esame. La quota investita nella società generalmente
permette di guadagnare una certa influenza sia sul management sia sui piccoli investitori.
Lo scopo di questo lavoro, quindi, è quello di mostrare come agiscono i più importanti activist
manager e come possono influenzare il valore di un’impresa. Mi concentrerò sulle loro
performance e cercherò di collegare i movimenti dei titoli alle decisioni prese da questi.
Ritengo che possa essere interessante capire se queste persone veramente riescono a
migliorare la situazione aziendale o se le loro azioni impattano solo sul valore di breve
periodo.
I singoli casi, poi, mi daranno la possibilità di analizzare le differenti strategie utilizzate dai
manager per accelerare i cambiamenti.
A questo proposito, possiamo individuare un filo rosso che lega tutti questi casi. Il primo step
di ogni nuova iniziativa (quando si tratta di una posizione lunga), infatti, è quello di
individuare un business ritenuto sottovalutato. Una volta che questo è stato trovato, possiamo
evidenziare differenti modi utilizzati per spingere ad un cambiamento dello status quo.
Quindi, dopo una piccola introduzione sull’industria degli hedge fund e sulle principali
strategie di investimento, presenterò quattro differenti casi. Utilizzerò sia i prezzi storici dei
titoli oggetto di analisi, vecchi articoli di giornale e documenti e lettere scritte dagli stessi
manager.
3
ACKMAN, B., 2013. Ackman: shorting stocks sees as “un-American”. Reuters, Apr 06. Available at:
http://www.reuters.com/video/2014/06/22/ackman-shorting-stocks-seen-as-un-americ?videoId=242092185
4
PREQIN, 2014. Preqin Special Report: Activist Hedge Funds. P.2

4. INDEX
1. Introduction
1.1 Hedge funds data
1.2 Hedge funds definition
1.3 Strategies
2. Activist approach
2.1 Just some numbers
2.2 Performances
3. Literature Review
4. Cases
4.1 Sony
4.2 PepsiCo
4.3 Fortune Brands
4.4 Herbalife
5. Conclusion
6. Bibliography

5. 1. INTRODUCTION
1.1 Hedge fund data
The global hedge fund industry rose at a rapid pace, albeit interrupted, since 2000. According
to Hedge Fund Research5
, hedge funds are estimated to manage around $2.2 trillion as of Q3
2012, the highest amount ever. Hedge fund launches rose through early 2014. Total hedge
fund capital grew globally to a record $2.7 trillion at the end of the first quarter, up from the
$2.25 trillions posted the year before. To be honest, the bulk of the increase came from a rise
in the value of investment held. But it is also true that new fund launches totaled 289 in 1Q14,
up from 244 in the prior quarter.6
The ratio between the market capitalisation of all the 46 European banks in the STOXX 600
index to assets under management in the global hedge fund industry was 1.2:1 at the end of
2006. By the end of Q3 2012 this ratio shrunk to 0.4:1, as the market capitalisation of
European banks was 57% lower while hedge fund assets were 50% higher.7
Barclays, instead, released different numbers8
. The trend is the same but the magnitude is
slightly smaller (see the graph)
AUM HF Industry ($bn)
0
500
1000
1500
2000
2500
1997
1999
2001
2003
2005
2007
2009
1Q2011
3Q2011
1Q2012
3Q2012
1Q2013
3Q2013
1Q2014
Talking about the performance, the Weighted Hedge Fund Index, which is a proxy for a
diversified hedge fund portfolio net of one layer of fees, compounded at an annual rate of
11.0% from January 1990 to August 2012.
One important thing that should be underlines is the non-participation in the internet-bubble-
5
HFR provides comprehensive hedge fund data, performance reports and indices to help investors make wise
investment choices
6
HFR, 2014. Hedge fund launches rise as capital growth accelerates. Available at:
https://www.hedgefundresearch.com/index.php?fuse=press
7
AIMA, 2012. Roadmap to Hedge Funds. Available at: http://www.aima.org/en/education/aimas-roadmap-to-
hedge-funds.cfm
8
Data available at: http://www.barclayhedge.com

6. bursting-drawdown in the early part of the 2000s. Nevertheless, these funds did not do as well
in the second large drawdown of the decade, the financial crisis of 2008. The 20% loss of the
average hedge fund portfolio came as a surprise.
Returns
0
20
40
60
80
100
120
140
160
180
200
Sep
2005
Jun
2006
Mar
2007
Dec
2007
Sep
2008
Jun
2009
Mar
2010
Dec
2010
Sep
2011
Jun
2012
Mar
2013
Dec
2013
Eureka HFI
Barclays
HFI
S&P500
1.2 Hedge fund definition
-"...Hedge fund' is a general, non-legal term used to describe private, unregistered investment
pools that traditionally have been limited to sophisticated, wealthy investors. Hedge funds are
not mutual funds and, as such, are not subject to the numerous regulations that apply to
mutual funds for the protection of investors - including regulations requiring a certain degree
of liquidity, regulations requiring that mutual fund shares be redeemable at any time,
regulations protecting against conflicts of interest, regulations to assure fairness in the pricing
of fund shares, disclosure regulations, regulations limiting the use of leverage, and more..."9
-"...The term 'hedge fund' is undefined, including in the federal securities laws. Indeed, there
is no commonly accepted universal meaning. As hedge funds have gained stature and
prominence, though, 'hedge fund' has developed into a catch-all classification for many
unregistered privately managed pools of capital. These pools of capital may or may not utilize
the sophisticated hedging and arbitrage strategies that traditional hedge funds employ, and
many appear to engage in relatively simple equity strategies. Basically, many 'hedge funds'
9
ANON., Securities and Exchange Commission, invest wisely: an introduction to mutual funds. Available at:
http://www.sec.gov/investor/pubs/inwsmf.htm

7. are not actually hedged, and the term has become a misnomer in many cases..."10
-"...There is no precise definition of the term 'hedge fund,' and one will not be found in the
federal or state securities laws. The term was first used to describe private investment funds
that combine both long and short equity positions within a single leveraged portfolio. It is
generally believed that the first such fund to employ this approach was an investment
partnership organized in 1949 by Alfred Winslow Jones .… Hedge funds are no longer
defined by the strategy they pursue. While a number of today's funds pursue the hedged
equity strategy of Jones, numerous different investment styles are embraced by hedge funds
.… Hedge funds are defined more by their form of organization and manner of operation than
by the substance of their financial strategies..."11
Starting from these statements, we could sum up some main points.
First of all, we should underline that the hedge funds/alternative investment moniker is a
description of what an investment fund is not rather than what it is. “...Hedge funds are
largely defined by what they are not and by the regulations to which they are not subject...”12
.
Not even the SEC (U.S. Securities and Exchange Commission) wanted/managed to pinpoint
this environment. Therefore, we face an unclear world. This definition released itself from the
idea of a specific pursued strategy. According to Lederman, in fact, now hedge funds embrace
different investment styles. Once, instead, the expression have been first applied to a fund run
be Alfred Jones. In that specific case the idea was to use both long and short positions in order
to “hedge” the portfolio's exposure movements in the market.
Now, managers deals with a broader environment. First of all, these investors are not focused
only on the equity world. The targets of a Macro hedge fund range from currencies to
commodities, not forgetting also the bond world and futures contracts. Anyway, it is certain
that when we talk about the hedge fund industry we look at an active way of investing money.
Managers do not mirror the market, but they try to spot the best opportunity of investment.
Their investment philosophy is materially different from the one of a manager who is tied to a
market benchmark.
Said that, we can distinguish two different types of investors. The first ones are called stock-
pickers. They do not really care about the surrounding environment. When they have to
invest, they focus only on the specific company, regardless of the trend of the sector the firm
10
DONALDSON, W., 2003. Testimony concerning investor protection implications of hedge funds before the
senate committee on banking, housing and urban affairs. April 10. Available at:
http://www.sec.gov/news/testimony/041003tswhd.htm
11
KIRSCH, C., 1999. Financial product fundamentals: a guide for lawyers. (s.l.): Practising Law Institute
12
BECKER, B. and DOHERTY-MINICOZZI, C., 2000. Hedge funds in global financial markets

8. belongs to. On the other hand, some managers prefer looking at the industry. Once they target
a profitable sector or geographical area, they pick a group of related companies. This
approach is known as top-down, whereas the first one as bottom-up.
To help understand this world, we can compare it with another kind of investment possibility,
the mutual fund.
The first thing to underline is that hedge funds can invest in a wider range of securities. Even
if many hedge funds invest in traditional securities, such as stocks, bonds, commodities and
real estate, they are best known for using more sophisticated (and risky) investments and
techniques. They both are pools of underlying securities but hedge funds are designed for a
small of sophisticated investors, such as wealthy individuals and institutions.
Mutual fund managers are paid fees regardless of their funds’ performance. Conversely,
hedge fund managers receive both a “percentage fee” and a “management fee”, usually equal
to the 2% of the AUM. That is appealing to investors who are disappointed when they have to
pay fees to a poorly performing mutual fund manager. On the down side, this compensation
structure could lead hedge fund managers to invest aggressively to achieve higher returns,
increasing investor’s risk.
1.3 Strategies
In order to simplify and lead the customers, hedge fund managers try to define what they do.
Therefore, we can present the main strategies the managers undertake:
-Equity long only refers to the idea of only holding "long" positions in assets and securities.
To be "long" means being a buyer, generally one who only gains in case of an increase in
prices. A long only strategy performs very well during a bull environment, being that the
portfolio follows the market. Instead, this idea does not fit well in case of downturns, since
the exposure to the market is very high.
-Equity long/short involves taking long positions in stocks that are expected to increase in
value and short positions in stocks that are expected to decrease. Basically, this idea consists
of buying an undervalued stock and shorting an overvalued one. Short positions can be useful
double fold. First of all, these positions help reduce the exposure to the market. Then, the
manager can gain from a possible decrease in value of the asset. Therefore, these positions act
both as a hedge and as a bet.

9. -Event-driven is an investment strategy looking for pricing inefficiencies that may occur
before or after a corporate event, such as a bankruptcy, merger, acquisition or spinoff. This
strategy turns out to be profitable, but it is also true that investors must be willing to
accept some risk. Many corporate events do not occur as planned. This can ultimately reduce
the price of a company’s stock. The current price, in fact, mirrors the event’s probability of
success. As a result, event-driven investors must have the knowledge and skill to accurately
assess whether a corporate event will actually occur.
-Global Macro funds analyze how macroeconomic trends will affect interest rates,
currencies, commodities or equities around the world and take long or short positions in
whichever asset class is most sensitive to their views.
Performances are among the most volatile of any hedge fund strategy.
-Relative Value arbitrage is an investment strategy that seeks to take advantage of price
differentials between related financial instruments, such as stocks and bonds, by
simultaneously buying and selling the different securities—thereby allowing investors to
potentially profit from the “relative value” of the two securities.
-A fund of hedge funds is an investment vehicle whose portfolio consists of shares in a
number of hedge funds. The fund of funds simply holds a portfolio of other investment funds
instead of investing directly in securities, such as stocks, bonds, commodities or derivatives.
The benefit of owning any fund of funds is to deal with experienced management and
diversification. A portfolio manager uses his skills to spot the best investors based on past
performances and other qualitative factors, like his work experience. It must be said that even
though most hedge funds have prohibitively high initial minimum investments and,
especially, might turn out to be closed to investments, through a FoHFs, investors can
theoretically access them, even with a relatively smaller investment. But, on the other hand, it
is also true that investing in this kind of funds requires a second layer of fees, in addition to
the ones charged by the underlying hedge funds.

10. 2. ACTIVISM APPROACH
I would like to deal with a smaller group, belonging to the Event Driven world. I am talking
about the Activist managers. The peculiarity of this circle of investors is that, rather than
looking for profitable events, they try to deliver this situations.
2.1 Just some numbers
By almost any measure, activist approach carved out an important position in recent years,
with assets subscriptions quickly growing and returns consistently outperforming the average
hedge fund world.
These funds appear to be growing in terms of both numbers and size. Preqin13
indicates that
activist Hedge Funds now account for more than $100bn in combined AUM (Assets Under
Management). There were 28 new Hedge Founds with an activist approach launched in 2013.
This data represents the highest number of this kind of fund launches since 2007. Just to give
some numbers, the AUM of the largest activist Hedge Funds Elliot International turns out to
be $15.6bn.
This trend allowed managers to target bigger companies. The larger fund’s AUM, the larger
are the amounts of money to invest. Therefore, the average size of money invested by
Activist funds differs hugely. For instance, according to Activist Insight, Icanh’s average
investment is $1.2bn. Numbers are a little bit smaller, even if always shocking, when we talk
about Pershing Squares ($960mn) as well as Value Act ($380mn) and Third Point
($380mn)14
.
In recent years, these managers asked for the replacement of board members and of senior
management at Abercrombie & Fitch as well as Yahoo, pushed for spinoffs at PepsiCo, Sony
and McGraw-Hill and called for an increase in stock buybacks at Apple.
2.2 Performances
If I had to spot the reason for these trends I would look at performances. According to
Bloomberg15
, activist investors generated a 48% average gain for shareholders of targeted
companies in the last 5 calendar years. Therefore, these managers outperformed the S&P500
13
PREQIN, 2014. Preqin Special Report: Activist Hedge Funds
(Preqin provides comprehensive data and research on Private Equity, Real Estate, Hedge Funds and
Infrastructure Funds and other alternative investments)
14
ACTIVIST INSIGHT, 2014. Activist Insight Annual Review
15
LACHAPELLE, T. and BETH, J., 2014. Investors Picking Fights Enhance Value as Stocks Beat S&P 500.
Bloomberg, Mar 31. Available at: http://www.bloomberg.com/news/2014-03-31/raiders-turned-activists-prove-
boon-for-stocks-beating-s-p-500.html

11. by about 17%.
Anyway, to be honest I should also account for risk. A higher volatility is associated with this
outperformance. And returns are a function of taking risk.
If we focus on the three-year Sharpe ratio (RFR=2%), we find out a lower feature (0.52) than
the one of the all HF industry (0.77) as of 30 April 201416
. Therefore, if this type of approach
magnifies the gains, it is also true the opposite. Over the last five years, the maximum
drawdown for both the hedge fund industry and the activist managers was in September 2011.
But, even if the direction was the same, the size of the impact was different. We are talking
about a loss of the 7.2% against a drop of the 12.4%.
This consideration could be one reason why these managers have yet to gain widespread
appeal to institutional investors globally.
But we can be even more precise. In their paper, Brav, Jiang, Partnoy and Thomas (2008)17
found out returns depends on the stated goals of the hedge funds. The most profitable
strategy concerns the sale of the target company, with an average abnormal return of 8.5%. It
is interesting that also the aim to intervene without any specific goal generates posted an
average good performance (6.3%). Conversely, managers who target company with sleepy
managers and governance issues usually have only small positive gains.
16
PREQIN, 2014. Preqin Special Report: Activist Hedge Funds
17
BRAV, A., JIANG, W., PARTNOY, F., THOMAS, R., 2008. Hedge fund activism, corporate governance,
and firm performance. Journal of Finance 63, 1729-1775

12. 3. LITERATURE REVIEW
Given these numbers, everybody should appreciate this phenomenon. But some people argue
that activist hedge funds benefit at the expense of the other shareholders. Just to give you a
name, one of this side’s supporters is Mr. Lipton, a founding partner of Wachtell, Lipton,
Rosen & Katz. The lawyer said that studies showing benefits for shareholders are misguided.
Then he added that they do not consider how an activist’s campaign might distract boards of
directors on matters of short term influence on stock prices, sacrificing in this way longer-
term objectives. Stock buybacks, to give you an idea, may result in more debt or less spending
on research and development. Also the emphasis on raising dividends is to keep investors
happy over the short run. Therefore, according to this side, we only face a short term
appreciation strategy. These persons claim that this approach follows a self-serving agenda,
which could not be aligned to the interest of the company.
Klein and Zur (2009)18
showed that, “...in contrast to previous studies documenting positive
abnormal returns to target shareholders, we find that hedge fund activism significantly
reduces existing bonholder’s wealth...” (p.2). The two researches found evidence of an
expropriation of wealth from bondholders to shareholders. To be honest, this should be
consistent with prior studies, as usually in this kind of situations we face a decrease in cash on
hand as well as an increase in debt-to-assets ratios and in dividends to common shareholders.
This approach could be profitable for shareholders but, at the same time, usually reduces the
cash available for future interest and principal payments. To be more precise, according to
them, bondholders earn a mean excess bond return of -3.9% around the announcement of the
stake, as well as an additional -6.4% over the remaining year.
As to commitment, Dionysia Katelouzou (2013)19
found out that the 40% of the managers of
her sample invested over a more than 3 years period.
It is true that this approach achieves short-term abnormal returns. Brav et al. (2008) stated that
an activist fund's investment results in large positive average abnormal returns, in the range of
7% to 8%, during the (-20, +20) announcement window.
Said that, this performance is not reversed over time. Prices decline if and only if the
campaign has been unsuccessful. This is a proof that the rise in price after the announcement
conveys market's expectation of success. Price adjustments reflect the expected gains deriving
from the campaign adjusted for the probability of success. But the increase could have
18
ZUR, E. and KLEIN, A., 2009. The impact of hedge fund activism on the target firm’s existing bondholders.
Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572594
19
KATELOUZOU, D., 2013. Myths and realities of Hedge Fund activism: some empirical evidences. King's
College London – The Dickson Poon School of Law. Available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2152351

13. different explanations. Someone claimed high returns is only a temporary price impact caused
by buying pressure. After the announcement, in fact, the target company could be spotted as a
momentum stock. Aware of the usual trend, some big investors could push the demand up.
Indeed, the run up in prices is accompanied by the abnormal trading volumes.
The fact is that if the impact was only temporary and did not reflect any future value
improvement, we should obviously observe negative performances shortly after the
announcement. But data do not support this conclusion.
The idea of a temporary increase stems from the belief managers simply spot undervalued
companies, but they do not improve firm's situation.
Therefore, the rally in prices is not justified by fundamental value. But, once again, market's
numbers do not back this hypothesis. If a hedge fund fails and exits from an ongoing
campaign, this should not affect the stock's price. According to the previous idea, in fact, the
rise in prices does not stem from expectations of an improvement of the firm's situation.
But, according again to Brav et al. (2008), the average abnormal return is usually about -4%
during the (-20, +20) exit window.
This drop could only be explained by investors' disappointment about the failure.
Moreover, giving a qualitative answer, if activist managers were simply stock pickers, they
should sell as soon as the stock appreciates.
A stock picker would lock in his gain when market's participants understand the stock is
undervalued. Anyway, this is not what usually happens.
To be honest, it is also true that would be difficult and costly to sell the position, since hedge
funds have to make a public statement if they reduce their stake below the 5% . Therefore, it
could be possible managers use long holding period to avoid this situation.
Eventually, Smith (2013) sided with Lipton. The researcher first showed that firms targeted
by activists performed worse than peers over the period 2007-2011. The average return
resulted in -27.5%, against a slightly positive performance (+0.7%) posted by similar
companies. Anyway, she then stated “...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 firm in the short term, but that no reversal was found during the
subsequent year...” 20
(p.5). Furthermore, she claimed her results did not show any evidence of
an improvement in capital allocation efficiency. By showing a lack of improvement in CFROI
20
SMITH, M., 2013. Does hedge fund activism facilitate more efficient CAPEX reallocation?.

14. (Cash Flow Return On Investments), the researcher was holding the claim hedge fund
interventions do not create any additional long-term value.
Actually, this goes against what Brav and his colleagues found out. In their paper, in fact, they
claimed that “...positive market reaction is also consistent with ex post evidence of overall
improved performance at target firms...” (2008, p.1731). According to them, EBITDA/Assets
(EBITDA/Sales) increases by 0.9 to 1.5 (4.7 to 5.8) percentage points 2 years after the
intervention.

15. 4. CASES
What I would like to do now is trying to sum up everything I said, linking these concepts to
real situations. To do so, I will present four different cases, regarding the most important
active managers in the world. I picked these cases having a mind to explain a particular aspect
of the phenomenon. Therefore, I think every story is interesting for one reason.
I will start talking about Daniel Loeb and his choice to take a position in Sony.
4.1 Sony
As stated previously, activist investors usually attempt to use their rights as shareholders to
bring about a major change in the company. Once they bought a certain percentage of shares
on the open market, they try to push their agenda, publicly or behind the scenes. Therefore, an
investment of more or less the 10% in the company should be sufficient to engage with
management and other shareholders.
Obviously, you should take with a grain of salt this statement and, in order to show you what
claimed is not always true, I am going to present you the Sony case.
We should be aware the Japanese corporate culture works differently from our. Whoever
thinks that a sizeable ownership in a Japanese company means "control", lacks understanding
of this world actually works. Said that, we could wonder if an investor with only 6% of a
company would be able to shake it. Daniel Loeb, CEO of Third Point Capital, has been
making headlines finding the answer.
But let me better present you the situation.
Everything started on 14th May 201321
. In that day, Daniel Loeb stated he had acquired 6% of
Sony. This announcement immediately pushed stock’s price up, as well as its volume of
trades. It would be interesting to understand the reason behind the spike posted on the day
before the announcement, but it would distract us from our goal.
21
ALDEN, W., 2013. Loeb takes on Sony. New York Times, May 14. Available at:
http://dealbook.nytimes.com/2013/05/14/loeb-takes-on-sony/?_php=true&_type=blogs&_r=0

16. Volume
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
May1,2013
May13,2013
May21,2013
May29,2013
Jun6,2013
Jun14,2013
Jun24,2013
Jul2,2013
Jul10,2013
Jul19,2013
Jul29,2013
Aug6,2013
Aug14,2013
Aug22,2013
Aug30,2013
Sep9,2013
Sep18,2013
Sep27,2013
Volume
Anyway, coming back to Third Point, I must say the manager had a precise idea of what to
do. Broadly speaking, as the largest owner of Sony Corporation, Loeb asked for a spin-off. In
the letters delivered to the Sony's CEO, the manager spotted “…two strong businesses facing
different challenges side by side, each obscuring the other's true worth…”22
. I am making
reference to Sony Entertainment and Sony Electronics. What Loeb wanted to do was to
change the structure of the company. But rather than a standard public offering, the manager
suggested to prefer existing Sony shareholders as new owners of Sony Entertainment.
According to Loeb, by offering subscription rights to current shareholders, the company
would protect shareholders’ interests, since they would have the opportunity to gain from the
division’s hidden value. In this way, the parent company would maintain its control of the
spun-off business and, at the same time, reduce leverage.
Doing that, Sony could have been more focused on its main business: Sony Electronics. Loeb
considered this division a source of value and thought it was undervalued. To back his ideas,
the manager looked at peer multiples, stating that these values “...suggest there is over ¥525
of value per share not currently reflected in Sony shares...”.
Loeb also talked about a target gain, even larger than the one spotted by leading Japanese
equity research analysts. Just to give some numbers, the manager believed in a 60% profit,
against an estimate of 25% made by Bank of America Merrill Lynch and other analysts.
Said that, now I would like to focus on the market's reaction. Taking into account a window
of (-7,+7) days before and after the event, we can underline a shocking gain of the 36%. At
22
LOEB, D., 2013. Letter delivered to Mr. Hirai, May 14

17. the first day of May, in fact, the price posted by Sony (the stock listed on the Tokyo Stock
Exchange) was ¥1583, while only after 15 trading days the share traded at ¥2159. Now, I
think it would be interesting to widen our sample and compare our results with what stated by
Brav and his colleagues. In a window of (-20,+20) days, Sony posted a gain of 22% (starting
price ¥1658, ending price ¥2023), against the range of 7% to 8% stated by them. Furthermore,
I would like to underline the abnormal return of 10% posted by Sony the day after the
announcement.
Announcement (14/05/2013)
-8,00%
-6,00%
-4,00%
-2,00%
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
01/05/2013
02/05/2013
07/05/2013
08/05/2013
09/05/2013
10/05/2013
13/05/2013
14/05/2013
15/05/2013
16/05/2013
17/05/2013
20/05/2013
21/05/2013
22/05/2013
23/05/2013
Someone could answer-back that the company performed in line with the market. Therefore,
the jump could be explained by surrounding factors. But the point is that the Topix100, in the
same period, lost 2%. So, it is likely the movement stemmed from company related situations.
Looking at the performance at June 2014, it would be easy to say the market overreacted. At
the end of that month, in fact, the stock traded at ¥1682, coming back to the initial price level.
This would contradict what Brav et al. stated in their paper (2008, p.1730): “...We find that
the positive returns at announcement are not reversed over time, as there is no evidence of a
negative abnormal drift during the 1-year period subsequent to the announcement...”. But it is
also true they claimed that “… target prices decline upon the exit of a hedge fund only after it
has been unsuccessful, which indicates that the information reflected in the positive
announcement returns conveys the market’s expectation for the success of activism..”. Said
that, the only thing to do is to understand if we can define this campaign a failure. If this was
the case, what happened would be in line with what stated in the previous lines. To do so, I
will focus on the management’s stance.

18. As previously mentioned, it is challenging to interact with a Japanese corporate governance.
Being the largest owner might not mean anything in this environment. As a matter of fact, in
this case the manager did not manage to get what he wanted.
On August 6, the CEO of Sony announced in a publicly disclosed letter to Mr. Loeb he would
keep the entertainment arm, rejecting Loeb’s proposal, underlining the importance of synergy
between divisions.
In three days the stock lost the 10%, dropping from ¥2143 to ¥1927. I believe the trend in
prices clearly showed that the initial rise conveyed market’s expectation of success. The drop
helps me to prove that Sony was not only a momentum stock. As far as I am concerned, it
should be clear downward trend is linked to the investors’ disappointment.
Refusal (06/08/13)
-5,00%
-4,00%
-3,00%
-2,00%
-1,00%
0,00%
1,00%
2,00%
3,00% 06/08/2013
07/08/2013
08/08/2013
09/08/2013
12/08/2013
13/08/2013
14/08/2013
15/08/2013
16/08/2013
19/08/2013
20/08/2013
4.2 PepsiCo
As I did for Sony, I would describe this campaign a failure. Nelson Peltz, as Daniel Loeb, did
not achieve his stated goals. It is interesting to underline the two managers approached the
CEO pretty much in the same way. Both of them, in fact, delivered a letter to him, asking for
a spin-off.
What differentiates the two situations is the market’s reaction. In this case, ex-post data show
a lower volatility. Short-term performance is in line with what literature stated. In the (-
20,+20) window before and after the disclosure of the position, the stock gained the 10%.
This number is certainly more disappointing than the Sony one (22%), but it can be
considered a good gain in absolute terms. Moreover, as I already said, returns are a function

19. of taking risk. In that period, Pepsi stock posted a volatility three times lower than the Sony
one (on an annual basis the numbers are 2.4% against 7.9%).
Anyway, to be honest I believe the market already had knowledge of the position, as proven
by the article published by the Telegraph one month earlier23
.
Disclosure, (-7,+7) days
-3,00%
-2,00%
-1,00%
0,00%
1,00%
2,00%
3,00%
4,00%
10/04/2013
11/04/2013
12/04/2013
15/04/2013
16/04/2013
17/04/2013
18/04/2013
19/04/2013
22/04/2013
23/04/2013
24/04/2013
25/04/2013
26/04/2013
29/04/2013
30/04/2013
As far as the long-term trend is concerned, instead, Pepsi outperformed the Japan company. In
this case, in fact, the stock did not come back to its initial price level. Nevertheless, we should
be careful to give this campaign the credit for the increase in value. It is not so clear the link
between prices and events. Looking at the graph, we can certainly talk about a spike following
the stake disclosure. Anyway, what seems to be weird is the reaction to the goals stated by the
manager. Peltz announced his approach for the first time on July 17. In a white paper released
by Trian24
, the manager suggested two strategies. He said the best thing to do should have
been a merge with Mondelez. In this way, Pepsi would have become a “..global snack
powerhouse..” (p.6). He then stated that the acquisition should have been the catalyst for a
spin-off between the snacks and beverage arms. As a second proposal, Peltz asked only for
the separation of the two arms in two standalone companies. The following sentence is
sourced by his presentation. “..We believe a separation will create a focused snacks leader
positioned to deliver attractive growth and productivity initiatives that hit the bottom-line. We
believe it will also create a beverages leader that can combine an efficient capital structure,
high dividend and operational improvements to unlock value..”. About him, “..PepsiCo’s
growth businesses are overshadowed by beverages..” and “..PepsiCo is destined to be viewed
23
HARRINGTON, B., 2013. Nelson Peltz plots £112bn Cadbury merger. The Telegraph, Mar 22. Available at:
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9947125/Nelson-Peltz-plots-112bn-
Cadbury-merger.html
24
TRIAN, 2013. PepsiCo, Executive Summary, p.1-24. File available at: http://trianwhitepapers.com

20. as #2 to Coke, despite snacks comprising 2/3rds of PepsiCo’s value..”. The manager then
defined the status quo as unsustainable, after reporting the disappointing performance posted
in the recent years.
The point is that investors seemed to be let down by this statement. If you look at the graph,
you can spot a downward trend starting from the 19th of the month. Only in the day of the
release and in the day after we can see a moderate increase in value (1.45% and 1.83%). If I
had to give an explanation for these disappointing results, I would say this strategy had
already been embedded in the price. Broadly speaking, Peltz suggested the same approach
used for Cadbury Schweppes. Therefore, lots of investors forecasted his proposal as soon as
he disclosed his stake. In the first months of 2013, the manager took also a relevant position
in Cadbury-owner Mondelez. On March 22, even before Trian filed the 13F report, Ben
Harrington25
anticipated the stake in the companies and his following goals. In the article, he
stated “..although both Mondelez and Pepsi's share prices have performed well in the last
year, traders said one strategy Mr. Peltz may push for is a combination of both businesses..”.
Said that, the performance posted before should not surprise. At this point, it should be clear
the goals became obvious as soon as Trian disclosed its positions.
In the light of that, it is difficult to explain the reaction to the second white paper released. On
February 19, the activist investor reaffirmed his call for spin off. He then added he would
have bought additional shares as well as he would have been willing to join the board. This
announcement followed the company’s one. PepsiCo, in fact, the previous week had said that
its snacks and drinks business complemented each other, maximizing company’s value. In
this way, PepsiCo kept rejecting Mr Peltz’s proposals, defining them “..costly distractions that
will harm shareholder interests..”26
. Therefore, the environment was the same and also the
reaction should have been as the previous one. But, if we look at the graph, we can see that,
starting from the middle of February 2014, the trend completely changed. On February 19 the
stock traded at $77.1 whereas at the end of June the same share was worth $89.3. I believe we
should focus on other aspects in order to explain this increase in value. A possible explanation
could be the unexpected performance. In February 2014, PepsiCo released the fourth-quarter
data of the previous year, reporting an increase of 17% in profit27
. We can say the same thing
25
HARRINGTON, B., 2013. Nelson Peltz plots £112bn Cadbury merger. The Telegraph, Mar 22. Available at:
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9947125/Nelson-Peltz-plots-112bn-
Cadbury-merger.html
26
WAPNER, S., 2014. Pepsi rips Peltz plan as 'costly distraction'; says investors back strategy. CNBC, Feb 27.
Available at: http://www.cnbc.com/id/101452616
27
STANFORD, D., 2013. PepsiCo Fourth-Quarter Profit Gains 17% on Higher Prices. Bloomberg, Feb 14.
Available at: http://www.bloomberg.com/news/2013-02-14/pepsico-quarterly-profit-exceeds-estimates-amid-
marketing-drive.html

21. for the first quarter of 2014, when Pepsi boosted profits more than estimates28
. Also the plan
to repurchase its stocks helped the share to gain value.
Eventually, I believe market reactions were in line with what said by the literature sided with
activists. As we already saw, the short-term appreciation follow what stated by researchers.
Instead, for what concerns long-term results, I believe it would be useless to focus on them. I
showed you a failure case, as well as I did with Sony. As Brav and his colleagues claimed, it
should not be surprising that target price declined if the campaign had not been successful,
obviously keeping all the other factors affecting the value unchanged. Then, since the
manager did not achieve his goals, we can not assess if he had create value or not, excepting
for the capital gains or losses deriving from price movements.
4.3 Fortune Brands
Since I already dealt with two different failure campaign, now I am going to focus on a
manager who achieved his goals.
This case concerns Pershing Square and Fortune Brands. Fortune dates its origins to the 1864.
The company historically had a significant diversity of products. It expanded into home
products in the 1980s and added seven liquor brands from Seagram in 1991. It has owned the
Jim Beam distillery since the 1960s and exited tobacco in the 1990s. The turning point was on
December 8 2010. In that date, Fortune Brands confirmed it planned to break up the company.
Starting from that day, the company’s value jumped. But let me be more precise.
Everything started on October 8 2010. On that Friday, Bill Ackman filed a 13D29
regarding
stakes in different companies. One of them was the American holding company Fortune
Brands. To be more precise, the manager took the 11% of the holding. Obviously, Ackman
deemed the company was undervalued. The manager was convinced the sum of the parts was
worth more than the whole holding. Said that, let me look at numbers. As usual, I am going to
focus on the short-term, precisely on the (+20,-20) window. In this period of time, the value
rose by 14%. It goes without saying that we are talking about a great gain, especially if we
have in mind the usual appreciation of 7%. The performance is even more amazing if we
focus on the (-7,+7) window. In this period of time, the company posted a gain of 11%.
28
STANFORD, D., 2014. PepsiCo Quarterly Profit Rises 13%. Bloomberg, Apr 17. Available at:
http://www.bloomberg.com/news/2014-04-17/pepsico-quarterly-profit-rises-13-.html
29
This document must be filed with the US SEC by any investor exceeding 5% ownership in a publically traded
company. This must be done within 10 days.

22. Announcement, (-7,+7) days
-4,00%
-2,00%
0,00%
2,00%
4,00%
6,00%
8,00%
28/09/2010
29/09/2010
30/09/2010
04/10/2010
05/10/2010
06/10/2010
07/10/2010
08/10/2010
11/10/2010
12/10/2010
13/10/2010
14/10/2010
15/10/2010
18/10/2010
19/10/2010
Ignoring the differences in magnitude, what I said is in line with the other cases I showed you.
Therefore, I would rather look at the long-term numbers. Differently from Sony and PepsiCo
campaigns, in fact, in this case the company performed well even in a longer time period. The
main reason can obviously be spotted in the Fortune’s will to go along with Ackman’s
suggestions30
. On December 8, the company announced its will to split the holding into three
separate businesses and focus on distilled spirits. The idea was to spin off its home and
security division as a publicly traded company and sell its golf unit. As a matter of fact, on
May 20 2001, the company announced the definitive agreement for the sale of its golf arm31
.
The buyer was a group led by Fila Korea Ltd. The business was worth $1.2 billion. And what
about the other two businesses? On October 3, Fortune Brands stated it would spin off the
Fortune Brands Home & Security business. Following the event, the company would have
ditch its non-liquor-related businesses, working as a pure-play spirits company, renamed
Beam Inc32
. Ackman kept his positions in both these companies.
To date, the manager is invested only in the liquor-related company. Nevertheless, according
to 13F filings, the manager strongly reduced his exposure in the first quarter of 2014. To be
30
FORTUNE BRANDS, 2010. Fortune Brands announces intent to separate company’s three businesses. Dec
08. Available at:
http://fortunebrands.com/news/ReleaseDetail.cfm?ReleaseID=535650&ReleaseType=Corporate
31
FORTUNE BRANDS, 2011. Fortune Brands announces agreement to sell Acushnet Company golf business.
May 20. Available at: http://www.fortunebrands.com/news/releasedetail.cfm?ReleaseID=579669
32
FORTUNE BRANDS, 2011. Fortune Brands announces details for spin-off of Home & Security unit and
completion of business separation. Aug 25. Available at:
http://www.fortunebrands.com/news/ReleaseDetail.cfm?ReleaseID=601217&ReleaseType=Corporate

23. more precise, Ackman decided to sell out the 43% of his position33
. This choice is not
difficult to understand. On January 14, indeed, Beam Inc. agreed to be acquired for $16
billion by the Japanese company Suntory Holdings Ltd. Investors got $83.5 in cash per share,
that is 25% more than Beam’s closing price ($67) on January 1334
. At that point, the manager
probably wanted to enjoy part of the fruits of his investment. If we only consider the time
period starting from the Beam’s inception, dated on July 15 2013, the manager posted an
amazing gain of 28.5%.
Anyway, the position in the home and security business would have been even more
profitable. In the second quarter of 2012, Ackman sold out his remaining 13,3 million shares
of the company at an average price of $22. He made a significant profit on the holding which
he purchased in the fourth quarter of 2011 at an average price of $1535
.
Actually, the manager exited the position prematurely. As a matter of fact, on June 30 the
stock traded at $40. At the day the manager exited, the housing market was getting much
stronger, with the home improvement and new home construction markets showing signs of
improvement in 2012.
But I have to give credit to Ackman’s team for correctly assessing that the company would
not need to make any capital expenditures to increase annual revenues from $3.3 billion at the
end of 2011 to $5 billion. That’s because it was operating at 60% manufacturing capacity.
Pershing’s presentation estimated that FBHS’s stock was worth $14 per share even if the
housing market never recovered36
.
According to Forbes37
, starting from the inception the company posted an average earnings
surprise of 52% over the first three quarters. To be honest, the company kept on beating
expectations as well as posting growing revenues and earnings. Just to give another example,
according to Zacks38
, the company “…posted strong fourth-quarter 2013 results with adjusted
earnings per share (EPS) of 38 cents rising 65.2% on a year-over-year basis…. For the full
year, Fortune Brands posted adjusted earnings of $1.50 per share, reflecting a 69% surge from
33
Data available at: http://whalewisdom.com/filer/pershing-square-capital-management-l-p
34
FLETCHER, C., 2014. Suntory to Buy Beam in $16 Billion Deal for U.S. Brand. Bloomberg, Jan 14.
Available at: http://www.bloomberg.com/news/2014-01-13/suntory-to-acquire-beam-for-16-billion-to-gain-
maker-s-mark.html
35
ANON., 2012. Hedge Fund Manager Bill Ackman's Latest Picks. Forbes, Aug 17. Available at:
http://www.forbes.com/sites/gurufocus/2012/08/17/hedge-fund-manager-bill-ackmans-latest-picks/
36
ASHWORTH, W., 2013. Fortune Brands: A great-but-not-perfect moment for Ackman. InvestorPlace, May 9.
Available at: http://investorplace.com/2013/05/fortune-brands-a-great-but-not-perfect-moment-for-ackman/
37
ANON., 2012. Fortune Brands: Double-Digit Rise In Revenues. Forbes, Jul 02. Available at:
http://www.forbes.com/sites/zacks/2012/07/02/fortune-brands-home-security-double-digit-rise-in-revenues/
38
An investment research firm focusing on stock research, analysis and recommendations

24. last year and coming ahead of the Zacks Consensus Estimate of $1.49. GAAP earnings for the
full year came in at $1.34 per share, surging 88.7% year over year…”39
.
As to the growth of the company’s market capitalization, instead, on December 2010 (just
before the spin off) the whole company was worth $9.3 billions40
. Ignoring the golf business,
which accounted for nearly a fifth of Fortune Brands’ total revenue41
, now the standalone
businesses are worth $20 billions.
The last thing I would like to focus on regards the market reaction to the exit. I would like to
check the truthfulness of what Brav and his colleagues stated. They claimed that if the
investor does not fail, and this is the case, “...trading volumes tends to spike during the 10-day
window leading up to the filing...” and that the event does not affect the stock price.
Unfortunately, we only know Ackman reduced his stake in the second quarter. Therefore, not
having a precise date, it would be useless to prove the statement. Anyway, we can spot the
spikes in trading volume over the quarter.
Volume
0
2.000.000
4.000.000
6.000.000
8.000.000
10.000.000
12.000.000
Mar1,2012
Mar9,2012
Mar19,2012
Mar27,2012
Apr4,2012
Apr13,2012
Apr23,2012
May1,2012
May9,2012
May17,2012
May25,2012
Jun5,2012
Jun13,2012
Jun21,2012
Jun29,2012
Jul10,2012
Volume
As to the performance, instead, we can agree with what claimed by the researchers. The stock,
in fact, kept on going up. On the first trading day of April, the share traded at $21.7, while on
the last trading day of June was worth $22.3.
It goes without saying Bill Ackman has been very helpful, as the numbers show. His gain, in
fact, is associated with an unquestionable improvement in the company’s environment.
39
ZACKS EQUITY RESEARCH, 2014. Fortune Brands Posts Robust Q4 Earnings. Jan 30. Available at:
http://www.zacks.com/stock/news/121374/Fortune-Brands-Posts-Robust-Q4-Earnings
40
GELLER, M., 2010. Fortune Brands to split company, hold its liquor. Reuters, Dec 8. Available at:
http://www.reuters.com/article/2010/12/08/us-fortunebrands-idUSTRE6B723H20101208
41
ANON., 2011. Fortune Brands Sells Golf Business for $1.23 Billion. New York Times, May 20. Available at:
http://dealbook.nytimes.com/2011/05/20/fortune-brands-sells-golf-business-for-1-23-billion/

25. As a matter of fact, if the reality coincided with our sample, we could only support this
relatively new approach. In the case in which the board went along with activist manager’s
wishes, both shorter and longer term results improved.
Stock price
0
5
10
15
20
25
30
Mar1,2012
Mar9,2012
Mar19,2012
Mar27,2012
Apr4,2012
Apr13,2012
Apr23,2012
May1,2012
May9,2012
May17,2012
May25,2012
Jun5,2012
Jun13,2012
Jun21,2012
Jun29,2012
Jul10,2012
Stock price
4.4 Herbalife
I would like to focus on the Herbalife case. I believe this matter can answer one of our main
question. As far as I am concerned, in this case one only investor managed to strongly affect
company’s value. But let me start from the beginning.
Herbalife is a global nutrition and weight management company. Mark Hughes, the founder
of the company, structured it using a direct-selling. The multi-level marketing model
attracted lots of independent distributors who sold its products door-to-door or through word
of mouth, without relying on retail stores.
As Microsoft, Facebook and other American companies’ stories, this one seems to be an
amazing case of success. Starting from the trunk of his car, Hughes managed to bring to life
one of the world’s leading consumer product companies. Herbalife has experience remarkable
growth since its formation in 1980. But is this amazing trend really sustainable? Someone
would claim the business is likely to collapse. But why? Is it only envy? Is it only a vile
attempt to speculate from this statement?
To answer these questions we should focus on the business model.
The company pays out up to 73% of product revenues to distributors in the form of royalty
and bonus income and incentives as well as retail and wholesale profits. The plan is designed
to maximize rewards for effort and drive individual customer-distributors to hire other
customer-distributors to work for them. Therefore, distributors make money based not only on
their own product sales to consumers but on the sales of others they sponsor and bring into the

26. business.
Aware of these elements, Bill Ackman gave a shocking presentation at a special Ira Sohn
event on December 2012. Talking about the business model, the manager tagged it as a
pyramid scheme.
Ackman claimed that the participants in this structure make more money from recruitment
than from sales, selling the idea of selling Herbalife products to others.
The main point was that Herbalife’s retail sales were far less than it claimed. Therefore,
Ackman asked himself if the company could be labelled as a business opportunity rather than
as a product company.
The presentation42
started with a shocking statement: Herbalife sells six times more nutrition
powder than Abbot Labs, Unilever and GNC combined. The second puzzling element is that
company’s products are more expensive than comparable powders, but the retail price
premium is difficult to justify. Its products, in fact, are commodities. Furthermore, Herbalife,
as stated in a letter to the SEC, spends “de minimis” dollars in advertising. Therefore, the
explanation given by Ackman for the selling of unadvertised, commodity products at an
inflated price is that the company bundles its products with a business opportunity. Prices are
inflated to pay the commissions of the people who joined the network earlier. But Herbalife
claimed that the company “helps you to be your own boss” as well as to “improve your
lifestyle”.
According to Dr. Peter Vander Nat, a business is labelled as a pyramid scheme if
“...participants obtain their monetary benefits primarily from recruitment, rather than the sale
of goods and services to consumers...”43
. Therefore, this kind of businesses are illegal because
the money at the top is made from the losses of people at the bottom. Anyway, the problem is
proving that this is a scheme. Bernie Madoff’s one was easier to because of the lack of
genuine underlying “product” except for the investment itself. In that case, gains were posted
mostly by finding more investors. Therefore the link between the model and fraud was more
direct. Conversely, Herbalife supplies real goods that are technically meant for end users.
Moreover, the company is also secretive about the amount sold to final consumers as opposed
to middlemen.
42
ACKMAN, B.. Ira Sohn Conference. New York, 19/12/2012. Who wants to be a millionaire?, p.1-80
43
VANDER NAT, P. and KEEP, W., 2002. Marketing fraud: an approach for differentiating multi level
marketing from pyramid schemes. Journal of Public Policy & Marketing 21, p.139

27. Before analyzing market’s reaction to these statements, I would like to examine in depth what
Ackman claimed. I certainly give the credit to Ackman’s team for gathering all the
information, but I believe the team did not report any news.
The company already had troubles in May 2012. During a conference call, in fact, David
Einhorn asked for an explanation of financial incentives to supervisors who hire new
distributors44
. He then worried about how much products are really sold to consumers outside
the network. Even CNBC45
cared about this company, reporting that the pyramid scheme’s
matter is so compelling that the company added in its website, among the FAQ (frequently
asked questions), few lines regarding “business practices”.
In November 2011, then, the Commercial Court in Belgium ruled that Herbalife was a
pyramid scheme. 46
Even if Herbalife filed an appeal against the case and won a Belgian
appeals court ruling rejecting claims the company is a pyramid scheme47
, this event proves
that several investors were suspicious of the business.
Said that, theoretically the price should have embedded these ideas. Therefore, the reaction of
the market to Ackman’s presentation should have been controlled. The manager, in fact, only
presented what lots of investors already thought. But it is also true that in an uncertain
environment, investors may prefer to follow suit rather than risk to take a contrarian position.
Differently from what I previously claimed, in this case I believe investors worried about
what others thought rather than Herbalife’s growth. On the other hand, it could be also likely
that investors forecasted a probable shutdown. In his presentation, in fact, Ackman claimed
the target price for the position would have been zero. The manager hoped that the Federal
Trade Commission would have taken a research. Therefore, if we agree with that idea, we
should not surprise if the price dropped after the presentation. In four trading days, starting
from the day before the presentation, the share fell by 29%. I also focus on the day before
because on that day CNBC reported Ackman would have presented a case for betting against
44
BURRITT, C. and STANFORD D., 2012. Herbalife Falls After Fund Manager Queries Disclosure.
Bloomberg, May 2. Available at: http://www.bloomberg.com/news/2012-05-01/herbalife-falls-after-fund-
manager-queries-disclosure.html
45
GREENBERG, H., 2012. Reasons to Worry About Herbalife: Greenberg. CNBC, May 08. Available at:
http://www.cnbc.com/id/47340065
46
ANON., 2011. Herbalife statement regarding Belgian Commercial Court Ruling. Bloomberg, Dec 16.
Available at: http://www.bloomberg.com/article/2011-12-16/aAEofXAUY_6E.html
47
ROSENBLATT, J., 2013. Herbalife Wins Dismissal of Belgian ‘Pyramid Scheme’ Suit. Bloomberg, Dec 6.
Available at: http://www.bloomberg.com/news/2013-12-06/herbalife-wins-dismissal-of-belgian-pyramid-
scheme-suit.html

28. Herbalife48
. Investors, frightened by Ackman, might have thought that company’s collapse
was very likely. Broadly speaking, we could talk about a probability of the 30%.
This explanation could work and would justify the drop. But, as I already said, could also be
possible the market spotted Herbalife as a momentum stock. If it was true, investors would
have been willing to take a contrarian position, regardless what they really think about the
company. What they only cared about would have been what other investors believed.
But is only one investor really able to affect a company’s value? We are not talking about a
small cap company, being that Herbalife had a $6 billions market capitalization in 2012. But
it is also true that Ackman took a $1 billion short position. The stake was sizeable and,
exactly for this reason, able to catch the attention. Therefore, this single investor was able to
pressure state and federal regulators. As shown before, this single act could cause company’s
value to drop.
This situation is slightly different from the ones presented before. The previous cases, in fact,
regarded only long positions. I claimed the market expected an improvement and these
expectations drove the value to grow. Anyway, I believe that this idea works also in the
opposite situation. Every time an active investor discloses one of his positions, the market is
quite confident in a future change, no matter in which direction.
This change could unlock a source of value, improving the company’s situation. But it can be
also possible that the manager deems the company is overvalued. Therefore, by means of a
public statement, he tries to point out the major shortcomings.
I strongly believe this case might be identified as a market inefficiency. The market over-
reacted to the information, making a systematic error. This error affected the price and
allowed arbitrageurs to take advantage of this situation.
To be clear, when I talk about arbitrageurs I have two precise investors in mind: Daniel Loeb
and Carl Icahn. After Bill Ackman, in fact, also these two managers disclosed their stake in
Herbalife, taking yet the other side of the trade. They believed the company was undervalued,
above all after the drop due to Ackman’s presentation.
After the disclosure, the market followed suit. Two of the biggest managers in the world
jumped into the fray and this obviously caused the trend to turn on a dime.
48
ANON., 2012. Breaking news from CNBC’s Kate Kelly: Pershing Square’s Ackman shorts Herbalife. CNBC,
Dec 19. Available at: http://www.cnbc.com/id/100328561#.

29. Herbalife
0
10
20
30
40
50
60
Nov21,2012
Nov27,2012
Nov30,2012
Dec5,2012
Dec10,2012
Dec13,2012
Dec18,2012
Dec21,2012
Dec27,2012
Jan2,2013
Jan7,2013
Jan10,2013
Jan15,2013
Jan18,2013
Herbalife

30. 5. CONCLUSION
I aimed to understand if activist investors really succeed in affecting company’s value. Then, I
was interested in separating long and short term results.
Beyond a doubt, the announcement of a stake has a remarkable impact on the stock price. The
cases shown are perfectly in line with what stated by Brav et al.. This increase definitively
benefits shareholders, at least in the short term. Conversely, according to Klein and Zur, this
approach importantly decreases existing bondholder’s wealth, both in the short and in the long
run. Anyway, Brav et al. claimed they do not find evidence of redistribution from creditors to
shareholders. If it was the case, in fact, shareholders’ gain “...should be higher in companies
with higher levels of leverage, especially long-term debt...”49
. Instead, I believe it is clear the
principal target of this approach is the management. It is true that investors targeting sleepy
managers do not achieve remarkable gain, but I think it is easier to push their agenda if they
chose a couple of trusted workers in the board. It goes without saying the company sees the
turnover rate increasing. Accompanying this increase is the drop in the wage level. In their
paper, the researchers claimed “...the CEO compensation in the target companies is on
average $914,000 higher than the equivalent measure of CEO compensation at peer
companies in the same industry that are of similar size and stock valuation...One year after
hedge fund intervention, CEO pay at targeted firms is not distinguishable from peer levels...”.
This could be said to be a good point if the decrease in wages did not cause the flight of the
best employees. Secondly, it must be the case the company hired new workers depending only
on their skills and experience.
As far as long term results are concerned, I would not consider the first two presented cases.
Both are examples of a failure, as managers did not manage to achieve their stated goals.
Sony posted a downward trend in the long run. This circumstance would back Mr. Lipton’s
ideas, as well as the ones of everybody sided with him. Anyway, as I already said, this result
can not be considered as significant. Changes in price can not be associated with Daniel
Loeb's ideas. As a matter of fact, the company did not go along with his wishes. Actually, it
could be even said that the drop in prices was due to investors’ disappointment, as the market
might have hoped for a change in the company’s structure.
Instead, PepsiCo posted a compelling pace. But, to be honest, even in this case we can not
associate results with the activist approach. As I previously mentioned, I believe the increase
49
BRAV, A., JIANG, W., PARTNOY, F., THOMAS, R., 2008. Hedge fund activism, corporate governance,
and firm performance. Journal of Finance 63, 1729-1775, p.1767

31. in prices stemmed from other factors. Rather than Peltz’s influence on the company, I would
focus on the several unexpected good performances posted by PepsiCo.
Said that, I would not spend too much time on Fortune Brands. I believe it is clear this is a
success not only for Bill Ackman, but for the industry as a whole. In this case, Ackman
unlocked the company’s value, succeeding in delivering three different profitable businesses.
If we only looked at this experience, everybody would be happy with this approach.
Eventually, I would like to comment what said about Herbalife. Differently from previous
situations, I believe the market over-reacted to the announcement, not correctly pricing the
value of Bill Ackman’s intervention.
Anyway, I have to say I can not be confident of what I claimed. It can not be excluded that the
market changed his mind after Icanh and Loeb took their contrarian positions.
But the recovery posted by Herbalife might mean the stock had been pushed by euphoria and
fear rather than rationality. If this was the case, we should agree with what Mr. Lipton
claimed.
Activist investors would cause the market to over-react. Obviously, managers could take
advantage from this situation, bringing back prices to the fair level. Therefore, as stated by
Mr. Lipton, we would face only short-term benefits.
Data and cases are not many, as we are dealing with a quite recent phenomenon. Therefore, I
consider very hard to achieve a certain answer regarding to long-term results. Anyway, I am
quite confident in the effectiveness of this approach for short-term investors. All the cases I
presented posted striking performances. In the light of that, it could be said that other
investors, aware of the possibility of achieving amazing gains, are inclined to back these
efforts, pushing up also prices. But as soon as the investments appears no more profitable,
they used to sell off their positions, causing the price to drop.
Anyway, I must acknowledge I believe in this approach. Even shareholders more interested in
longer term results could benefit from such events. As a matter of fact, activist investors tend
to push for a policy liked to shareholders’ world. The only stakeholders, if anything, who are
allowed to complain are the existent creditors. The great majority of these policies concerns
risk transfers from shareholders to bondholders. This could lead to an increase of the costs, as
future creditors believe the investment is more risky. In the light of that, someone could argue
that this situation could negatively affect all the stakeholders. Higher costs means lower
earnings and, therefore, lower dividends.

32. But the trade-off between total benefits and costs depends on the starting point. As far as I am
concerned, I think it is fair to ask for a higher payout ratio when cash flows could be invested
in more profitable assets than the company’s ones. Furthermore, if the cost of debt is lower
than the company’s profitability, everyone should be happy with an increase of the leverage.
Therefore, if we believe these managers can spot these particular situations, we would only
face improvements for the company as a whole.

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