The Morning Brief: Democratic Senators Target Activists

March 21, 2016   Stephen Taub


A group of Democrats has declared war on activists. A bill has been proposed in Congress aimed at forcing activist hedge funds to disclose large holdings more quickly. The Brokaw Act, introduced by Wisconsin Senator Tammy Baldwin and Oregon Senator Jeff Merkley and co-sponsored by Vermont Senator and Democratic presidential candidate Bernie Sanders and Massachusetts Senator Elizabeth Warren, would require investors to disclose positions in a stock of at least 5 percent within two days rather than the current 10 days. The bill would also change the definition of "person or group" and require more funds to file as a single group in specific stocks. And the legislation would require investors who are "net short" to disclose these positions under certain circumstances. "Derivatives are part of every activist’s toolkit," the bill’s sponsors say in their statement. "In some cases they are used to create a 'net short’ that allows the activist to profit by secretly voting against the company’s interests. Currently, derivatives and other synthetic instruments do not require disclosures despite the fact that they can have substantial impacts on the price of the security and its issuer. This can allow funds to secretly bet against a company they are invested in."

The Brokaw Act gets its name for a small Wisconsin town that went bankrupt after a local Wausau Paper mill closed. The Senators blame a hedge fund for triggering the closure, arguing that it "forced out its executives and demanded short-term returns like buybacks at the expense of the company’s long-term future." They did not name the hedge fund firm, which seems to New York-based Starboard Value.

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Another money manager is leaving BlueCrest Capital Management, which is returning all outside money. New York-based John McNiff had joined London-based BlueCrest in 2012 after serving as co-head of commercial mortgage-backed securities trading at Bank of America Corp. There’s no indication yet where Mcniff will land.

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Shares of hedge fund favorite Adobe Systems surged nearly 4 percent to $93.42 after Credit Suisse raised its target price on the enterprise-software maker from $70 to $85. The investment bank pointed out in a note to clients that Adobe reported results for its first fiscal quarter that beat expectations. It also raised its estimate for fiscal 2017 and 2018. However, the bank maintained its Neutral rating on the stock, asserting that much of the enthusiasm in the company is also reflected in Adobe’s valuation. Deutsche Bank maintained its Buy rating and $110 price target. The stock is the fourth-largest holding of San Francisco-based ValueAct Capital, which in turn is the eighth-largest shareholder of Adobe. The stock is also a top holding of two tiger Cubs —Dallas-based Maverick Capital and New York’s Coatue Management.

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Deutsche Bank raised its price target on hedge fund favorite CBS Corp. from $60 to $64 after the media giant’s investor day. "We learned…that management is executing against even more aggressive five-year targets than we had forecasted for the key growth drivers," the bank told clients in a note. "While we had thought all along that the probability for these revenue pools to be larger was high, the articulation of management’s targets raises our conviction level." The bank also increased its estimates for 2018 through 2020, which it stresses are "still below management’s targets." The stock closed up a little less than 1 percent, to $54.71. Top-10 holders of CBS include Boston-based Highfields Capital Management and New York-based Glenview Capital Management.


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