We know that a hedge fund called Mantle Ridge has driven the destructive changes at CSX. It occurred to me that I did not even know what a hedge fund is. Consequently, I do not know why they have so much power nor why they can force the changes they have been able to force. Here are some questions I would like answered.
What is a hedge fund exactly?
Where does the name “hedge fund” come from?
Are these organizations interested in railroads as a general rule?
How many times have hedge funds become involved with railroad companies, other than CSX?
What were the results of the involvements in question 4, either for better or for worse?
These organizations seem to be feared, and hated, by businesses that they become involved in. Is that true?
I have heard that hedge funds only want to sell off their target companies and pocket the money. If that is the case, and it is a bad thing, then what can be done to bring these organizations to heel?
Are there Railroads that are, for lack of a better term, invulnerable to hedge fund involvement or take over?
What are some other railroads that might be targeted by hedge fund organizations and why?
That as all I can think of for now. I hope I do not sound overly ignorant. Financial things are not my forte, but I want to understand the present situation as best as I can. Thank you in advance for your help.
You're likely to get far better results by doing a quick Google search of sites such as investopedia to give yourself a working knowledge of what hedge funds purport to do and why there is often 'more' to their activist strategies than mere hedging of risk would otherwise involve.
You might find this to be a reasonable introduction.
Your item #4 if followed leaves out one of the more interesting examples of hedge-fund activist interference in railroads, as it also involved CSX, and in a far more venal way than anything I see Mantle Ridge and Paul Hilal doing. If you google 'Children's Investment Fund' you'll get all the detail you want, and probably quite a bit that will not make you happy.
One good reason 'businesses that they become involved in' are not delighted with them is that they generally value only "money" return, and that usually measured in no longer than quarterly increments, and are willing to use a range of activist strategies to maximize that short-term gain purely for financial reasons. Why this is disastrous for railroads in particular needs little further discussion...
There are a number of hits if you search "hedge funds." I think the short answer is, it's complicated.
From Wikipedia, why they're called hedge funds: "The term "hedge fund" originated from the paired long and short positions that the first of these funds used to hedge market risk."
From another site comes the revelation that unlike mutual funds, hedge funds are not currently regulated.
Another revelation is that a hedge fund can borrow money to invest - essentially gambling that they'll get enough of a return from the investment to pay back the loan. This might well lead to some aggressive actions that wouldn't occur if they had to use their own money to do the investing. This might explain why some hedge funds appear so eager to milk every penny they can out of their victims.
I would opine that any company has to be of such a size that a hedge fund can buy in to the point where they can call the shots, and have a suitable financial position that will allow the hedge fund to extract money.
That they can borrow money in order to invest suggests that they need a quick payback, so as to deal with the debt. And that suggests that they don't really care about the long term as long as the hedge fund can maintain a positive financial position.
I could be wrong. I'm no financial analyst.
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
Answer to 8.: One is BNSF. It's a 100% owned subsidiary of Warren Buffett's Berkshire Hathaway - perhaps a corporation that represents the ultimate in long-term investments. Further, it's extremely sophisticated, and and huge enough to be the proverbial 800-lb. gorilla that no hedge fund could gain control of - BH might turn on and buy them instead! (if worth BH's while).
There may be others, such as short lines that are essentially family-owned - Pan Am Railways (formerly Guilford) comes to mind.
- PDN.
Something I find interesting is that since Harrison's death and James Foote being named CEO there has been little information revealed on the CSX-Mantle Ridge relationship.
Is Foote now Paul Hilal's frontman? Was the $84 million paid upfront to Harrison prior to his death? Just two of many questions the business news sites haven been talking about.
Norm
Since Mr. Foote is transforming another yard to flat switching, I have the impression that he is following in the footsteps of Mr. Harrison.
As to that exhorbitant pay, we may not know until CSX has to reveal its expenses.
Johnny
There's nothing wrong with converting a hump yard* to a flat switching operation. There is with the way Harrison and Foote are going about it.
(*) Unless it's a 24/7 operation with a limitless supply of cars and then the advantage is just about even. Two places in my career showed that if you put a flat yard and a hump in close proximity to each other, the hump loses. (any the flat yard can switch more cars with less manpower and associated costs, given the same number of switch crews)...On top of that, hump yards eat up huge chunks of real estate.
"Activist Investor" may be a better term for those coming into a company and turning it upside down to squeeze out every cent possible. A Hedge Fund may usually be, maybe almost always is, that investor. It's not just railroads, but at least weekly I hear or read about an activist investor taking a position in some company and pushing for changes to squeeze out more shareholder value. I thought I heard that was part of what's going on at GE.
These activist investors don't have to own a controlling interest. They just have to convince others who's holdings added to the activist investor's total at least 51% of stock to vote their way.
The other day I had my biannual employee review, for want of a better term. My supervisor said now that EHH is dead, they (not sure if he meant senior or local management) are hoping pressure might let up a little. (Note, for those that don't know where I work, it's not CSX.) The other major carriers also are aflicted with pleasing the activist investors. While CSX may have had the most and quickest sweeping changes, it's clear to see many things done to cut costs as much as possible have been happening. Now field level management (where I work) are starting to feel the cuts. Not necessarily numbers of managers, but a reduction and outright elimination of some benefits and bonuses. Enough that many with craft seniority are thinking about going back into the ranks. (I've heard of a few who can't go back to the ranks. They have low seniority on their home districts and can't hold a job there.)
Jeff
Our community is FREE to join. To participate you must either login or register for an account.