Becht M.,Franks J.,Mayer C.,Rossi S.
ECGI Working Paper, Brussels, 2006
This study reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme (BTPS), on engagements with management in firms targeted by its U.K. Focus Fund (HUKFF). In contrast with most previous studies of activism, we report that the fund substantially outperforms benchmarks and estimate that the abnormal returns are largely associated with engagements rather than stock picking. The study categorizes the engagements and measures their impact on the returns of target companies and the fund. We find that Hermes frequently seeks significant changes in the company's strategy including large asset sales, divestments, reductions in capital expenditure and changes to payout policy. Hermes also seeks and achieves major changes to executive management including the replacement of the CEO or chairmen.