The battle being waged by two hedge fund managers over Sears Canada Inc. is reminiscent of Mad Magazine's old Spy vs. Spy struggles of operatives employing similar methods, unable to easily outwit one another to achieve their objectives.
On one side is William Ackman, founder of Pershing Square Capital LP, who has been called a crackpot for trying to break apart McDonald's Corp. last year.
On the other side is Edward S. Lampert, the hedge fund investor who took over K mart Corp., which then acquired Sears Roebuck & Co. to form Sears Holdings Corp.
Sears Holdings now wants to buy the 46% of Sears Canada it doesn't own, offering C$16.86 a share, or US$720 million total. But the offer isn't flying, as Mr. Ackman builds support among other investors to seek a higher price for the shares.
The fight illustrates the fact that hedge funds, though greeted with fear by much of corporate America, have been serving shareholders by unlocking value in companies.
Let thousands of hedge funds bloom and the markets and the economy will make better capital allocation decisions. Hedge funds are not monolithic in their motivations and methods, as the Sears Canada fight shows. Hedge funds don't rule the universe. They don't control enough shares of a company to do whatever they want. They depend on pursuing other shareholders to follow them to make changes.
In another current case, Knight Vinke Asset Management, a long-only fund that takes stakes in a few companies and uses shareholder activism to improve corporate performance, is opposing the buyout of VNU NV by a private equity group that has the support of VNU's board.
Knight Vinke believes the offer substantially undervalues the Dutch company. Owning less than 2% of VNU's shares, its success will depend on enlisting other investors to its view. They might be listening. VNU postponed its annual meeting to June 13 and devoted the originally scheduled April 18 meeting solely to a comprehensive discussion for shareholders of the proposed buyout offer.
Activists must have constructive ideas. Unless they can make a persuasive case, the market will ignore them, their strategy will backfire and clients will withdraw their funds. The market imposes a discipline that forces investors and corporations in the long run to promote shareholder value.