Activists Take Aim at Financial Firms

Investors agitate for change at the heavy hitters.
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The drumbeat of activism is getting louder from hedge funds, and this time it's a new set of players hearing the noise.

Over the past week, several shareholders have set their sights on change at big-name financial services companies.

Atticus Capital, a hedge fund run by former hockey player Timothy Barakett, is encouraging

Barclays

(BCS) - Get Report

to

drop its controversial acquisition of

ABN Amro

(ABN)

. The fund, which reportedly holds a 1% stake in Barclays, says killing the deal will boost the U.K. bank's "undervalued" share price.

Elsewhere, SAC Capital and Jana Partners are

pressuring

TD Ameritrade

(AMTD) - Get Report

to merge with one of its online brokerage brethren --

Charles Schwab

(SCHW) - Get Report

or

E*Trade Financial

(ETFC) - Get Report

-- in order to "dramatically increase long-term shareholder value."

The financial services industry has seen relatively little uproar from activist shareholders, largely because banks are already so heavily regulated. The notable exception would be last year's fight between Relational Investors and

Sovereign Bancorp

(SOV)

, which called attention to the bank's lagging stock and resulted in many big changes, most importantly the ouster of CEO Jay Sidhu.

But the trend away from shareholders sitting back passively gives rise to the question: Are these hedge funds true agents working to maximize value? Or are they ultimately a hindrance to company management as they search for avenues to create outsized returns quickly for their own investors?

Activist investors "put management teams on watch" and "cause companies to think more critically," says Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners, an investment banking firm that specializes in financial services companies.

"The number of activists is going to continue to soar because they have been

more successful, frankly, than in years past," he adds. "Institutional investors generally have a shorter time horizon than retail investors. It's only natural that more and more professional investors will choose this approach for investing."

Hedge funds aside, individual investors and even mutual funds have been hopping on the activist bandwagon.

One individual investor forced change at

Yardville National Bank

(YANB)

, which last week agreed to a $403 million sale to

PNC Financial Services

(PNC) - Get Report

.

Lawrence Seidman, who holds upward of 9% of the stock and is Yardville's largest investor, had been calling on the bank to overhaul management or consider a sale.

The bank has been flanked with problems, including errors related to the reporting of the company's provision for loan losses. That led to a restatement of Yardville's 2006 results. The company also has potential credit-quality problems, since a majority of its lending comes from commercial real estate loans in a saturated housing market.

Yardville CEO Patrick Ryan told

Reuters

last week that the combination of the inverted yield curve and "an activist dissident shareholder who brought legal and other expenses to the table, compounded by the lack of quality asset growth opportunities, made our jobs all the more challenging."

Still, active shareholders might sometimes become overbearing by forcing companies to make investment decisions that are more short term in nature, Fitzgibbon says.

"There might be a missed investment opportunity that would have generated far superior returns over the long haul," he points out.

Joe Moglia, TD Ameritrade's CEO, should know.

The Omaha, Neb., broker's chief executive spent the better part of last week convincing analysts and investors that the firm is in no rush to do a large acquisition, after SAC and Jana, which own a combined 8.4% of the firm, sent two letters urging the company to find a merger partner.

Activist investors create a "media-type distraction," despite the fact that they are simply "doing their job," Moglia said during a Sandler conference on the exchanges last week.

Moglia said TD Ameritrade is going to be "deliberate" in pursuing its M&A strategy, and its next acquisition may not be limited to the online brokerage space.

As for Barclays, it remains to be seen whether it will be swayed by one of the heavy hitters in the hedge fund space.

But so far the bank is sticking to its knitting.

"The views expressed by Atticus Capital are not representative of the feedback that we have received from shareholders, who remain supportive of our strategy," Barclays said in a statement. "We believe this transaction will create significant incremental value for our shareholders and meets our rigorous financial criteria."