Trends in Activist Investing: What You Need to Know
Few Investor Relations (IR) professionals will evade contact with activist investors in coming years as their influence grows. During the next four weeks, I'll will examine what’s new with activist investors and what these changes mean for 2016 and beyond. We’ll start by answering some basic questions: who are activist investors? What do they want? And how do they go about getting it?
We’re in the golden age of investor activism – and it’s called that for a reason. In 2014 alone, the number of activist investors identified in regulatory filings jumped more than 40 percent from 2013. The rise in popularity comes as activists like Carl Icahn, William Ackman’s Pershing Square Capital Management, Jana Partners, and other hedge funds beat the overall market and find new ways to force change at companies where they see untapped value. In aggregate, activists now control more than $200 billion in assets, up from about $12 billion in 2003, meaning no company is too small, or too large, to escape the activist gaze. Activists have targeted companies with less than $10 million in market capitalization as well as large ones like Apple and Yahoo.
Once reviled as “corporate raiders,” who split up conglomerates, today’s activist investors have rebranded themselves and refined their tactics. They take stakes in companies not because they like what they see, but because they perceive ways to seek out value for themselves – and other shareholders – in a relatively short time period.
A study by JP Morgan showed that half of activist campaigns are shorter than six months and two-thirds last less than a year. While their overall track record is mixed, high-stakes success stories have given these investors superstar personas and their reputation alone has changed the rules of the activist game. Instead of drawn out proxy fights, activists are reaching their goals with smaller ownership stakes through sophisticated media campaigns and the help of traditional investors. We’ll discuss each of those aspects in the remaining three parts of our series.
Activists utilize sophisticated computer models to identify targets and develop their campaigns. Companies with lots of cash on their balance sheets, or the ability to take on debt, make for popular targets as the activist seeks to force the targeted board to introduce or increase dividends, buyback shares, or make acquisitions. That’s what happened at Apple where activists won their bid to force the world’s largest technology company to hand over half of its balance sheet cash in the form of dividends and share buybacks.
For companies with diverse business segments, activists attempt to force a divesture often after making a compelling argument that the parts are worth more than the whole. Activist investors leaned on HP until it split the company into two pieces: one that focused on printers and personal computers and another specializing in enterprise software.
Companies that under-perform relative to their peers can expect activists to force operational changes, especially if executives are highly paid and their boards passive. Few companies now have staggered elections for board members, for example. That means an activist campaign can result in the replacement of the entire board as happened at Darden Restaurants. At mattress-maker Tempur Sealy, three executives including the chairman and CEO were not re-elected to the board as a result of an activist campaign. The CEO eventually resigned as part of a settlement with activists.
Next week, we’ll look at how activists use the media to bring their plans to life.