Form 13D

The Rules

A Schedule 13D must be filed any time a person, company or group has bought 5 percent or more of a company’s shares, or sold enough stock for its stake to fall below 5 percent. It must be filed within 10 days of the transaction. (A large shareholder who doesn’t intend to take any meaningful action can file the short form, 13G.) A group that collectively holds 5 percent or more of a company must also disclose its stake, even if no one member exceeds that threshold. In that case, the Schedule 13D will include the names of all associated investors with voting power or the ability to sell shares.

What to Look For

You can search for 13Ds by company to see what the firm’s major shareholders are up to. Alternatively, you can search for 13D filings from a particular investor. For example, Warren Buffett disciples like to know when the Oracle of Omaha issues a 13D disclosing a big position or sale. When examining 13D filings, pay close attention to the following:

Who’s buying (or selling). Schedule 13Ds are especially useful for keeping tabs on activist investors, who often engage in takeovers and proxy fights that can push a stock’s price higher. Here’s an A-list of activist investors:

• Carl Icahn
• Kirk Kerkorian (Tracinda Corporation)
• Eddie Lampert (ESL Investments)
• Ralph Whitworth (Relational Investors)
• Seth Klarman (Baupost Group)
• Nelson Peltz (Trian Fund Management)
• Bill Ackman (Pershing Square Capital)
• Richard Breeden (Breeden Partners)

Investors like these look for companies that aren’t living up to their potential. They take big positions, then try to shake up the company to make money for shareholders. “When an activist investor like Carl Icahn files a 13D disclosing a new position in a company’s stock, it’s a pretty safe bet that the investment isa precursor to some sort of challenge to the status quo,” says Chris Carey, editor of investment blog ShareSleuth. “It could be a takeover offer, an effort to shake up management or an attempt to break up the company to unlock hidden value.”

Fellow shareholders can ride the activists’ coattails to big gains. Carey gives as an example Icahn’s June 2009 13D filing, which disclosed that he had boosted his stake in Lions Gate Entertainment Corp. to 16.9 percent. “The shares rose nearly 9 percent in a single day,” he says. “And the stock has gained another 15 percent since then.”

Why they’re buying or selling. Check the “Purpose of Transaction” section, which offers insight into the investor’s intentions. For example, Icahn and his associated businesses issued a 13D on November 24, 2008, disclosing that they had purchased more than 5 percent of Yahoo. The filing explained that Icahn “is in favor of pursuing a transaction with Microsoft relating to the Issuer’s search business” and that “Mr. Icahn has also had discussions with Microsoft regarding such a transaction.” The upshot: A Yahoo-Microsoft deal suddenly became much more likely — and the stock jumped 21 percent over the following week.