William Ackman of the New York hedge fund Pershing Square Capital Management recently met with fast food giant McDonald's to discuss a drastic restructuring proposal he personally authored, according to the Chicago Tribune.
The meeting is further testimony to the power of today's fund industry, which by holding large stakes in corporations can often sway the decision-making of its board members.
"These are managers who are extremely smart and aggressive, and armed with lots of money," said Christopher Geczy, associate finance professor at the Wharton School of the University of Pennsylvania. "Most of all, they need to extract excellent returns quickly."
Whitney Tilson of the consulting group T2 Partners, said that Ackman's behavior is exemplary because he forced an underperforming company to take another look at its operations and change for the better.
"One of the great disgraces of the mutual fund industry is that they are incredibly passive," said Tilson, a McDonald's shareholder. "In all areas - capital allocation, executive compensation, options - rarely do you hear a mutual fund manager make a sound."
Ackman's plan calls for raising value by separating McDonald's 8,000 company-owned franchises, known as McOpCo, from the rest of the company. Ackman said that freeing McOpCo's stocks would allow the rest of the company to generate profits for buybacks and larger dividends.
David Palmer, an analyst at UBS, added that cutting McOpCo from the rest of the company would allow the franchise fees to flow into the mother company and swell company stock by approximately $45 per share.
Oakbrook, Ill.-based McDonald's rejected the plan, calling it "financial engineering," but experts say the company could incorporate some of Ackman's ideas into its strategy over time.
"If investors believe a sum-of-the-parts multiple would be much higher than a stand-alone business, they're going to make noise," Palmer said, referring to the ratio between a stock's share price and company's earnings. "Hedge funds see that buried treasure, and want it."
McDonald's is crawling out of a major slump and Tilson still believes Ackman's plan warrants attention.
"We think management is in the middle innings of a nine-inning game," he said. "They're doing a good job, but investors aren't going to sit idly by if they believe management can do better."