ASE FOR

CTIVIST

TRATEGIES

___________________________

Ramius White Paper

December 2008

Page 1

ASE FOR

CTIVIST

TRATEGIES

Over the past decade, the hedge fund business has evolved from a cottage investmentindustry to an institutionalized alternative asset class controlling approximately $1.0 trillion to$1.2 trillion in assets. Corporate and public pension funds, university endowments, familyoffices and insurance companies have allocated meaningful percentages of their portfolios tohedge funds in search of diversified, risk-adjusted returns.While these trends lend credence to the industry as a whole, asset growth has arguablyoutpaced the analysis and understanding of the hedge fund investment strategies thatinvestors have been required to evaluate. The recent unprecedented dislocation in globalfinancial markets has compelled investors to re-evaluate the merits of these strategies. In theface of broad deleveraging, market illiquidity, and government intervention, it is critical thatinvestors recognize the fundamental value proposition of these strategies in order to makethe most prudent investment decisions going forward.Activism, the investment approach of initiating company change to unlock value, is a strategythat is widely discussed yet characterized by misconceptions and incomplete understanding.Some critics and regulators question whether the work of activist investors actually benefitand create value for shareholders, and others debate the long term viability of the strategy.Furthermore, the diversity of methods and techniques employed by activist managers areoften eclipsed by the most visible “hostile” tactics used by a minority of activist investors.Despite activism emerging as one of the most prominent hedge fund investment strategies, itis only recently that comprehensive studies have assessed (and confirmed) its effectivenessin creating value.

This paper will provide clarity and insight into activist strategies by:(i) Providing a context and rationale for its emergence, evolution, and value creationcapabilities,(ii) Discussing the breadth of opportunities and consequent methodologies employed byactivist investors (the activist toolbox)(iii) Evaluating its success in boosting firm performance and identifying the requisite skillset needed(iv) Assessing the current environment, and(v) Presenting the portfolio applications for the strategy.

Alon Brav, et al,

Hedge Fund Activism, Corporate Governance, and Firm Performance

(September2006), available at http://www.fdic.gov/bank/analytical/CFR/2006/oct/hedge_fund.pdf.com; April Kleinand Emanuel Zur,

Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors

(October 2006), available at http://ssrn.com/abstract=913362

Page 2

MERGENCE

VOLUTION

AND

ATIONALE

The emergence of hedge fund activism over the past several years can be attributed to aconfluence of factors: corporate malfeasance by Enron, Worldcom and other majorcorporations weakened the power of corporate management teams and heightened demandfor improved corporate governance; the increase in overall M&A activity and related growthof private equity funds have led to greater opportunities for activists to execute theirinvestment strategies; the migration of former Wall Street sell-side research professionals(after Eliot Spitzer-led reforms) to activist managers; and lastly, a number of legal reformsand court decisions that have largely supported proxy contests and shareholder activism.

These forces have helped activists evolve from their ill-perceived corporate raider forefathersto respected value creating investors. The corporate raiders of the 1980s made hostile bidsfor corporations with the intent of quickly selling the pieces to strategic buyers to turn a profitor engaging in greenmail tactics for their own benefit. While hostile bids for companies arestill part of the activist landscape today, the predominant method of generating value isthrough collaborative engagement with the management of target companies, much of whichis done privately behind the scenes. Today’s activist seeks to identify and execute financial,strategic, corporate governance, and/or operational catalysts to unlock value for the entireshareholder base. Activist investors take a medium to long-term perspective (one to twoyears on average) to implement their initiatives.

Still, at the core, the basic theory behind the corporate raiders of the 1980s and present dayactivists are similar in that both seek to address the fact that corporations do not always dowhat is in the best interests of their shareholders. It is the classic agency problem of publiccorporations whereby ownership and control are separated. Shareholders typically remainrelatively powerless because of collective action problems, insufficient incentives, conflicts ofinterest, legal obstacles, and management power. Activist investors are different becausethey have enough shares to overcome collective action impediments, are sufficientlyconcentrated in their holdings to provide incentives, understand the legal and corporategovernance methodology for enacting change, are able to attract support from existingshareholders and turn over the shareholder base with other like-minded institutionalinvestors, and can pay the legal fees needed to execute the strategy. Consequently, theprincipal purpose of the activist investor is to function as a bridge between the shareholdersand corporate directors, which explains why opportunities for activist investors will continueto exist.

Ronald D. Orol,

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

,John Wiley & Sons, Inc. (2008) at 5-13.

at 13-24.

Thomas W. Briggs,

Corporate Governance and the New Hedge Fund Activism: An Empirical Analysis

,Journal of Corporation Law, University of Iowa College of Law (2007) at 710-713.