Elliott Management, the activist hedge fund credited in the change of Cognizant’s business model two years ago, recently bought a tiny stake in Wipro, the Information Technology Services Corporation. This investment further highlights the 34-billion hedge fund company’s interest in Indian IT companies as it presently owns two companies in this sector out of their 40 US listed stocks.
In the December quarter of last year, Elliott Management acquired 1.85 million of Wipro’s American Depositary Receipts (ADR), amounting 0.04% of the company’s shares, according to US Securities & Exchange Commission (SEC) filings. Both Elliott Management and Wipro declined to comment on questions related to the latter’s stake.
This deal somehow appears to be different from Elliott Management’s activist strategy investment with Cognizant. In 2016, the hedge fund company revealed owning more than 4% stake in Cognizant and asked it to start paying profits, institute buybacks and reorganizing its board. The company fulfilled their requesting by making a $3.4-billion capital return programme and replacing three board members. Elliott Management recently put pressure for the board shakeup of oil majors Hess and BHP Billiton.
Elliott Management, which is also backed by Paul Singer, is not the largest hedge fund investor in Wipro’s ADRs. AQR Capital Management, also in the December quarter had cut its holding in Wipro from over 13.6 million shares to over 9.6 million shares while Renaissance Technologies increased its holdings by 0.7 million shares from 1.1 million shares they previously owned.
According to Investopedia, Hedge funds are lightly regulated private investment funds which make use of nontraditional investment strategies and tax shelters to make extraordinary returns in the markets they invest in. The funds are usually structured as limited partnerships and limited investment to business. Elliott Management usually works as an activist hedge fund, meaning they engage with the company’s board and management, they also wage proxy battles, liquidate assets and can also force sales of companies.
However, as Azim Premji owns 73% of Wipro, any board battle will be a pointless enterprise. Following Elliott Management’s shakeup of Cognizant, a few Indian IT companies which included Tata Consultancy Services and Infosys announced large share buybacks with a combined value of 29,000 crore while Wipro announced its second share buyback in 2 years.
IT experts said that the never-seen-before disturbances in the industry at the moment will certainly attract investors. Consequently, there are three ways in which an activist hedge fund could ask companies to improve shareholder value –
- By cutting investments and increasing margins
- Overheads and sales costs
- Transitioning to a digital model quicker.
“Option 1 is by far the less risky and that is why it is favoured by the activist investors. Interestingly, the private equity community is increasingly interested in the industry and has already started to take positions in firms as well as taking them private. At this time the PE industry seems to be favouring options 2 and 3 and in some cases looking to combine them,” said founder of Everest Research and IT consutant, Peter Bendor-Samuel.
He further said that while IT companies have discussed about moving to a digital model, it would mean too many important changes and extreme moves, which could result in the fall out of existing business.