There has been lots written about the impact that hedge funds and private equity firms are having on the stewardship of public companies. There is a concern, which I share, that with these deep-pocketed players hovering, it is more difficult for a management team and board of directors to embark on a medium or long-term strategy to create wealth for their shareholders. I’m generalizing I know, but hedge funds and private equity tend to have a short time horizon. The hedge funds have to perform now, especially with the fees they are charging. Their notion of value creation is getting a pop in the stock. Private equity firms don’t have quite the same urgency, but because they’re spending other people’s money, they have a liquidity imperative that requires them to cash out of their investments as their funds near maturity.

In the context of this concern, I think it’s interesting to look at the Telus and Bell Canada story. Whenever an article is written about Darren Entwistle, the CEO of Telus, his foresight and determination is praised, specifically as it pertains to the Clearnet purchase. Clearly this transaction was brilliant and gave Telus’ management team the platform they needed to become one of the best telecom companies in the world.

Yet, what never gets mentioned is the fact that Mr. Entwistle was hanging on to his job by a thread in the years immediately after that transaction. Virtually everyone believed that Telus had paid too much for Clearnet, and as a result, had stretched its balance sheet too far. The management team’s credibility was at a low ebb. Fortunately for Telus bond and shareholders, Mr. Entwistle weathered the storm and stuck to the strategy. For that he deserves a lot of credit.

But what would have happened if Telus was in the same pressure cooker as Bell is today? I dare say that today there would be even more pressure on the board to get rid of Mr. Entwistle. And with private equity firms more inclined to undertake big transactions today (in terms of mindset, money and business imperative), there would likely be a greater push to privatize the company, break it up, or merge it with another company.

In hindsight, it would have been tragic if Telus’ board and shareholders had let the company be privatized. Since that time, it has been one of the best large cap stocks on the market.