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Back to the Future: The New Corporate Raiders

A rise in shareholder activism poses questions for companies with lagging share performance.

Fortnightly Magazine - September 2006

does not present the same risk/reward profile today that it did back when natural gas traded 50 cents on either side of three dollars. At the same time, the increasingly complex interrelationships among natural gas, coal, crude oil, and various forms of converting those (and nuclear) fuels into electrons continue to change the upstream landscape in the electricity business.

The risks and other defining characteristics of the production and delivery ends of the value chain are becoming increasingly disparate, which causes investors to question what they own in a given stock versus what they want to own. This logic applies to several of our covered companies in both natural gas and electricity, and we wonder whether a rising tide of shareholder activism might accelerate strategic initiatives in some cases.

We’re not calling for wholesale raiding, and would be the first to point out that sustained growth in this business requires the reinvestment of capital, especially right now. Aggressive share buybacks may boost returns for short-term investors, but can lead to value destruction over the longer term. Yet, at the same time, nothing focuses the mind like the prospect of being hanged.

Editor’s Note: The article has been adapted from a Wachovia Securities equity research report titled   Back to the Future , which was published in mid summer.