Question

Comment on the following quote:

.....this merger wave was set off by the demand of T. Boone Pickens' stockholders group that Gulf give shareholders the income from oil production rather than reinvesting it.

.....Pickens knew that any scheme he could devise to raise the stock price was likely to get the support of Gulf's stock controlled by institutional investors, mainly managers for pension funds. Such managers, as fiduciaries, must vote to increase the value of assets under their control. But a going business investing in its long-term future also increases value. Why should managers of pension fund money--by definition long-term money--be oriented towards short-term results?

Answer 1

The institutional investors, mainly pension funds, have fiduciary duties towards the pension plan participants. They usually have a long time horizon as they operate as a going concern. However, they may face liquidity issues if the benefit payments to the plan participants exceed the contributions from the plan sponsor in the short term.

By voting to increase the value of assets under their control, they can increase the funded status. Funded status = Present Value of Plan Assets - Present Value of Plan Liabilities. By increasing the funded status now, they could minimize the contributions from the plan sponsor.

Additionally, the additional surplus (plan assets - liabilities) gives them a cushion to make up for any market downturns.