As consumers, we want someone to fight on our behalf.
As mutual-fund investors, we probably don’t want it to be the guys running our funds.
That’s typically why you don’t hear about fund managers squawking when they wind up on the short end of some Wall Street deal.
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Instead, when a deal sours their investment premise, they typically take their beating and limp off to something they hope will turn out better.
Should fund shareholders expect better? Maybe.
To see why that question is hard to answer, one need only look at a current high-profile stock deal that has upset some well-known fund managers who, despite their objections, are most likely as helpless in the case as the average investor.
At Dell (DELL), company founder Michael Dell is leading a group that wants to buy the company back from investors for more than $24 billion.
While the amount seems enormous, the truth is that a share price in the $13 range is a disappointment for investors who thought the stock was undervalued at recent prices.
In fact, money managers at Southeastern Asset Management, which runs the Longleaf Partners funds, mostly paid more than the buyout price for Dell shares while amassing the largest independent stake in the company.
In a recent filing with the U.S. Securities and Exchange Commission, Longleaf managers said that they think the value for the entire company should be closer to $24 per share.
Longleaf funds buy stocks that are undervalued, waiting for them to reach their potential. With control of 8.5 percent of Dell’s voting shares — nearly 150 million shares in all — the difference between the go-private price and what the company thinks the stock could be worth amounts to $1.5 billion to the firm’s shareholders.
That hit is going to leave a mark.
While no one at Southeastern is talking, the regulatory filing — which pointedly noted that the firm will vote against the deal — makes one thing clear: Longleaf’s managers are mad.
The same can be said for the managers at T. Rowe Price, another top Dell stakeholder, which was politically correct in noting that “the proposed buyout does not reflect the value of Dell and we do not intend to support the offer as put forward.”
Several other fund firms have voiced similar sentiments behind the scenes, but haven’t taken a public stance.
In the mutual-fund world, those are fighting words.
Alas, such fights typically are futile.
At Dell, you have the company founder leading the buyout group; while he and management are allowed to search for something better, you have to assume that his direct involvement means that no one at the company will break a sweat looking for alternative offers.
Longleaf and T. Rowe Price can vote against the deal, but don’t control enough shares; their stakes combined are a bit smaller than what Michael Dell controls by himself.
Even if the other fund companies join them (and firms do not join together in these efforts for fears of stirring up their own regulatory issues), they will need support from some big institutional holders who don’t run funds — and who are perceived to be in Dell’s pocket — to have a prayer of holding the deal up.
Kurt Schacht, managing director of the Standards & Financial Market Integrity Division of the CFA Institute, said that large shareholders encounter situations like this all the time, but that even in those cases when they vehemently disagree with a deal, they must do a cost-benefit analysis to decide if it’s worth a fight.
“If the analysis shows that it’s not worth the time, not a big-enough stake or that there is little legal chance to block it in any event,” said Schacht, “just take the deal and move on. … I’m not sure if Longleaf, T. Rowe, BlackRock plus a few discontented others have that option [of rousing the shareholder base and fighting] here.”
Waging some sort of proxy fight requires funding — which fund shareholders would ultimately provide — and time.
When you consider that Dell amounts to less than 5 percent of the holdings in Longleaf Partners (LLPFX) and less than 1 percent of the assets in T. Rowe Price Equity Income (PRFDX), it’s hard to argue that management should spend a lot of time and energy on this battle.
Fighting on principle is valiant but foolhardy if it somehow distracts managers to where the funds’ performance suffers. No one wants to make a bad situation worse.
In fact, Longleaf has had a few other times in recent years when it objected to deals; in each case, there was no bite behind its bark.
That’s probably how Dell plays out too, with the fund managers — and thus their shareholders — remarkably powerless.
“Traditional mutual-fund managers are much more likely to use the proxy of their feet than to engage in public fisticuffs,” said industry consultant Geoff Bobroff.
“It’s unfortunate, and it allows some transactions to occur that probably shouldn’t. Fund shareholders should hate that it happens, but they really don’t want to be paying the costs for a fight that they can’t win, so sometimes they — and their fund managers — just have to swallow a bad deal.”
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at email@example.com or at P.O. Box 70, Cohasset, MA 02025-0070.
Copyright, 2013, MarketWatch