HERMITAGE CAPITAL MANAGEMENT CASE
1. Give definition of activist investor and discuss pros and cons
Shareholder activism, also known as shareholder engagement or share ownership, occurs when shareholders use their ownership rights to monitor and influence how their portfolio companies manage ESG issues.
Sullivan and Mackenzie (2006) categorize the activism strategies as (i) dialogue or engagement, in which companies meet with investor to discuss the firm’s strategy, how the firm plans to meet its objectives, issues related to CSR and corporate governance, and so on; (ii) the use of voting and other formal rights, including attending annual general meetings to ask questions, ...view middle of the document...
However, those that do establish a large position over time often have ideas about how management should use the company's assets, improve operations or enhance shareholder value.
* Demand For the Shares Could Perk Up Activists may snap up a large percentage of a company's outstanding stock in a relatively short period of time. In response, other firms and/or individuals might attempt to copy these activists by buying the stock as well in the hope of turning a tidy profit. This could push the stock price up and, by extension, benefit common shareholders.
The Potential Downsides to Activist Involvement
* Selling Could Be an Issue In some cases, activists may purchase large blocks of stock. When that happens, the share price may increase. However, when the activist decides it is time to unload the shares, it may logically place a significant amount of downward pressure on the share price.
* Activists Look Out for Themselves Activist firms often try to convince existing shareholders and the media to understand and buy into their agenda, but at the end of the day, they may be looking out primarily for themselves and doing what is in their best interests.
* Activists Aren't Always Right Right or wrong, many individuals perceive activists as being smarter than the average investor because they have extensive experience on the buy and/or sell-side. There is a belief that activists may have important industry contacts and access to solid research. However, activists aren't always right. Their timing can be off and they can (and do) lose money or become involved in situations that take an extraordinarily long time to pan out.
Having an activist engaged in a stock you own may be a good thing or a bad thing depending upon the situation. Perhaps the most important things to understand is that sometimes activists have influence over companies that the average common shareholder would generally not have. In addition, they sometimes bring new ideas to the table that could potentially lift value and/or open doors. On the downside, they can be extremely fickle, and sometimes when it comes down to it, they may keep their financial interests.
2. Describe in details investment strategy of Hermitage Capital
Hermitage’s unique research enables the firm to identify companies that have solid fundamentals, unjustifiably cheap valuations and "hidden assets" overlooked by the market.
Hermitage Capital takes large long-term positions in companies, which are highly undervalued on a fundamental basis, but often have corporate governance problems. Instead of waiting for the world to change, they launch their own corporate governance initiatives to unlock company’s intrinsic value.
Firstly, Bill Browder puts together a list of the most important companies as a percent of GDP and a list of the most important companies on the stock market. When a company is on the GDP list but not on the...