Shareholder activism is gathering adherents among hedge funds, attracting managers both seasoned with the strategy and otherwise. Somewhere in the middle of the experience spectrum is John Mutch.

Mutch is president and CEO of Peregrine Systems, the San Diego-based software company in the process of being acquired by Hewlett-Packard ( HPQ). He's preparing to launch MV Advisors I, an activist hedge fund, in January. Mutch personifies a new breed of manager hoping to turn his firsthand knowledge of turnarounds and corporate governance into big profits in investing. Tell us about your background.

John Mutch: Since 1997, with my appointment as CEO of HNC Software, I've been executing a series of restructuring, spinout and merger transactions that have delivered over $4 billion in incremental market-capitalized value to investors. I joined the board of Peregrine Systems in March '03 and I am still the CEO. A month ago, we announced the sale of our company to Hewlett-Packard. We'll launch MV Advisors I immediately upon the closing of the Peregrine transaction, sometimes after January.

TSC: How can you be a hedge fund activist without a hedge fund experience?

JM: My experience in working with companies' boards and running companies gives me the background to identify operational improvements of companies and approach management in ways in which they will trust me. I can tell a CEO: "I sat on your seat. I can understand what your issues are." My experience also taught me that well-governed companies with a high level of directors' professionalism achieve and exceed performance of poorly-governed companies.

TSC: How do you define well-governed companies?

JM: It's when you have an internal audit reporting directly to the chairman of the audit committee. It's when you have an independent corporate compliance officer who reports to the chairman of the compliance committee. Board members don't sit on the boards of suppliers. The CEO and the chairman are two different people. And people are held accountable through the compensation plan. On the other hand, a poorly-governed company is the all-boys club. All the guys went to school together. You slap my back, I'll slap yours.

TSC: What makes you unique?

JM: What we are doing is launching a classic shareholder strategy using a hedge fund. We'll be the only hedge fund that I know of that will be using shareholder activism focused on one sector, in our case, the technology industry. We want to raise $500 million invested in 10 different companies with an averge of $50 million invested in each.

TSC: What will be your approach in selecting the companies in which you will invest?

JM: We'll look at poorly-governed companies that are undervalued compared to their peers. We'll invest if we think we can increase the value by 30%. We'll take a 4.9% to 20% stake. The 4.9% threshold is because above 5% you need to file a 13D and we want to have the option not to. We'll begin with a soft approach. Our style is more along the lines of Ralph Whitworth's Relational Investors than Carl Icahn.

Icahn is very aggressive and gets a lot of press. But our approach is management-friendly. We'll look into restructuring, consolidating a product line, acquiring another company or the sale of the company. We'll also look very carefully at the compensation and incentives that people have.

TSC: Are you getting good feedback from potential investors?

JM: We've got very good feedback from the U.K.'s Hermes, which manages the British Telecom and post office pension schemes. We also got positive feedback from CalPERS. One interesting point is that both institutions are breaking down activism as a separate asset class in their portfolio. CalPERS use a bucket called "corporate governance," and they've started doing that only recently.

TSC: Do you think that activism is becoming a more established part of the hedge fund landscape?

JM: We're seeing more hedge funds engaged in activism because of the need to deliver superior returns to investors and because of the corporate governance issues that have to be resolved. Hedge funds are becoming more and more activist-oriented in the investments they have in public companies. Whitworth said recently that often the threat of a board seat can be more meaningful than a seat.

TSC: Why the tech sector?

JM: You are seeing a huge amount of companies that are created through the venture capitalism business. You have over 3,000 software companies, and yet only 17 companies have greater than one billion in revenues. They have $100 million-$300 million in revenue, but they can't grow this business any bigger. Something has to happen. They need to grow or consolidate or evolve in different spaces and boards alone are not competent to help these companies manage those challenges.
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