Royal Philips Electronics (NYSE:PHG) shares jumped today after two activist hedge funds teamed up to confront the company over its results and capital structure. Jana Partners and D.E. Shaw Group announced today that they plan to act together to jointly communicate their views regarding the electronic-maker’s operating performance and capital structure. Shareholders applauded the move as shares rose over four percent on the day.

The move comes after CEO Gerard Kleisterlee sold most of the company’s semiconductor assets and reduced the company’s stake in a flat-panel display venture to focus on medical scanners, appliances and lighting. These actions have provided Philips with around $30 billion in spare cash for purchases, buybacks and dividends over the next three years. Obviously, this has led to speculation that the activists are intent on unlocking this value and distributing the cash to shareholders. However, they may face some problems as Philips has been rather intent on what it plans to do with its cash pile.

The two hedge funds do have a strong track record of success, however, with successes in breaking up or selling ABN Amro – which became the largest bank sale in history after 183 years of independence. In the end, the hedge funds are targeting the cash position while the company likely wants more time to build out its plan. However, given the stagnant shares recently, a success on the part of the hedge funds may be in the cards. Combined, these factors make PHG a stock worth watching!

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Pershing Square Capital Management, the $6 billion activist hedge fund, is reportedly considering a public offering for one of its funds during the next couple of years. Bill Ackman, the famous man behind the fund, said that tapping public markets for funds would give it capacity to make larger investments and have more influence in its activist shareholder campaigns.

The move would follow that of several other hedge funds and private equity firms that have recently gone public. Fortress Investment Group (FIG) and Och-Ziff Capital Management (OZM) are the two most recent such hedge funds that have listed on the New York Stock Exchange; however, shares in both firms have declined since their IPO casting doubt on the viability of public hedge funds.

"The natural evolution at some point is that I believe our fund will be publicly traded," said Ackman, speaking at a New York conference on Wednesday. "It would give us more staying power and credibility with management. If we had permanent capital I think it would be good for investors and good for us."

Many investors have been watching Ackman’s Pershing Square since its successes in McDonalds (MCD) and Ceridian Corp. (CEN) where it won activist campaigns to unlock shareholder value. The famed activist acquired shares in McDonalds at around $28 only to have them rise to their current level around $60 while it has already raked in healthy gains in Ceridian at the same time. Investors are currently watching his long position in Target Corp. (TGT) and his short positions in MBIA Inc. (MBI) and Ambac Financial Group (ABK).

In the end, Bill Ackman is a very successful investor that definitely knows what he is doing. It will be interesting to see if any of his funds end up going public as they could represent great opportunities for investors to latch on to his great success much more easily than following SEC filings. Combined, these factors make Pershing Square a hedge fund worth watching!

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Mac-Gray Corporation (NYSE:TUC) executives may have to fight for their jobs after an activist hedge fund expressed their concerns about the company in a letter to the board of directors. Fairview Capital Investment Management voiced its apprehension over the laundry company’s growth and capital allocation strategies and suggested that it either pursue a high-dividend payout model or a sale in order to unlock shareholder value.

“Ever since its ill-fated attempts to enter other lines of business through the MicroFridge and Copico acquisitions in the late 1990s, Mac-Gray has focused on its core laundry facilities management business,” said Clark & Mathieson of Fairview Capital. “Despite achieving the revenue and EBITDA growth targets needed to earn large bonuses for Management, these investments have not led to improvements in ROIC, ROE, or EPS.”

Fairview Capital encouraged the company to remedy this problem by instituting a high-dividend payout model or pursuing a sale. The first option would entail the company restricting its annual acquisition and capital spending to $25 million and returning excess annual free cash flow of $19 million (or $1.45 per share) to shareholders through a dividend. This would result in an implied valuation of approximately $20 per share. Meanwhile, the second option would generate more immediate value for shareholders that may exceed $20 per share.

“Mac-Gray's current share price of $11.79 is only 7% higher than its 1997 IPO price of $11.00,” said Fairview in its letter to the board. “How much longer must Mac-Gray shareholders endure low returns on their capital and a depressed share price?”

Clearly, Mac-Gray is facing several issues that it cannot solve without a serious change of strategy. A high-dividend payout model would increase its valuation by distributing some of its free cash flow to shareholders while a sale of the company would provide more immediate returns. Whether or not the company decides to take either action remains to be seen, but this is definitely a stock worth watching in the meantime!

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