What's going on?
Shares of BHP Billiton, the world’s biggest mining company, jumped over 2% on Monday as one of the world’s largest hedge funds publicly suggested some major changes to the miner’s setup.
What does this mean?
Elliott Management is known as a so-called “activist investor,” which means that they often buy a stake in a company before publicly advocating that the company should make material changes to things like its strategy or corporate structure.
Elliott wants BHP to turn its US oil and gas business into a separate company that, Elliott says, would be worth more than it is as part of the large miner. It also wants, among other things, BHP to return more cash to shareholders (e.g. via dividends) rather than continuing to make what Elliott says are expensive acquisitions. Elliott thinks that its plans would increase BHP’s value by about 50% – which is quite a lot! However, BHP says the costs of Elliott’s suggestions would outweigh any benefits to shareholders.
Why should I care?
The bigger picture: Whether activist investors are a positive force is controversial.
Activist investors are sometimes criticized for promoting changes that offer short-term gains but hurt the company in the long-term. For example, today’s shareholders might like to have more cash returned to them, but if a company doesn’t invest in its future, then there might not be any cash for future shareholders. On the other hand, activist investors can provide an important role holding companies’ managements to account. At the very least, the presence of an activist investor forces a company to address the criticism and often results, at least, in some changes being made.
For the markets: BHP’s share price seems to be benefitting from the new ideas.
Whether Elliott’s ideas have merit is debatable as is whether its efforts will ultimately be successful (Elliott only owns 4% of BHP, so needs to convince other shareholders to back its plans). But investors certainly seem to be ascribing some value to Elliott’s ideas, as evidenced by the reaction of BHP’s stock price (+2%).