With assets managed by activist hedge funds increasing 269 percent to about $120 billion in the five years ended Dec. 31, 2014, shareholder activism continues to be a growing force in global investment.
Activism was once maligned as the work of corporate raiders moving into a company for a short-term boost in value with little regard for its long-term interests. That view is waning, with more companies open to activist proposals and some evidence that activist campaigns are having positive results for some companies. Hedge Fund Research supported that notion, reporting a 4.8 percent gain in performance by activist hedge funds in 2014, even after declines in September and October.
The stakes remain high for companies that choose to resist. In Sotheby’s third quarter 2014 earnings conference call, the company disclosed that it had spent $20 million in its legal battle with Third Point activist Dan Loeb, half of Sotheby’s net income for the first nine months of 2014. In the resolution with Sotheby’s, Loeb won three board seats but failed to unseat the CEO, and opinions are mixed about the overall effect of the conflict.
The success rate for dissident investors is on the rise, from 50 percent in 2004 to 71 percent in 2014, a great deal of power in the hands of 71 activist funds in an asset class of 10,000 funds. Several activist trends are in play:
The growth of dedicated activist funds
The great success of shareholder activism has spurred dedicated, activist-only investing as opposed to strategies that include activist funds as well as debt, mortgage bonds and other investments.
Increasing diversity of activists
The universe of activist investors is expanding. Early on big-name funds and high-profile activists like Carl Icahn, Dan Loeb, William Ackman and Dan Peltz captured media attention and instilled fear in companies that were natural targets because of factors like weak performance, board-CEO conflict or excess capital, among others.
Besides these dedicated activists, there are opportunistic activists who become aware of governance issues or other problems and use that information to get involved with a proxy fight. In these situations the odds are usually on the side of the activist, not the target. There are also occasional activists, those who stay in the background until they see an issue that find too compelling to let go. In such cases, they partner with or lend their support to another activist.
Accelerating pace of activism
Activists are targeting companies after shorter periods of underperformance. Ten years after the first high-profile activists began making moves on vulnerable firms, the industry is practiced in identifying the factors for evaluating opportunities and moving them toward closure. Activist campaigns that may have taken years can now sometimes be accomplished in 12-18 months.
One reason for faster campaigns is that activists are branching out beyond annual meetings and proxy season. Special meetings, direct contact with investors and other tactics all allow activists to pursue campaigns outside the annual meeting window.
Social media and the press
The Internet and social media have produced “real-time” activism, instant and anytime communication with shareholders through Twitter and Facebook. CNBC, CNN and Bloomberg have turned activists into celebrities who make their cases on 24/7 TV. For example, David Winters of Wintergreen Advisers recently launched a website, Fixbigsoda.com, to provide a forum for disgruntled investors; and Carl Icahn wrote a scathing Wall Street Journal article on CEO pay after he withdrew from a Dell shareholder vote. Activists have unprecedented platforms for communication, reaching a broad audience of shareholders they could not have connected with ten years ago.
Recurrent activism
Companies that survive one activist attack cannot afford to take a deep breath and think they are no longer a target from the same funds or new ones. Just 18 months after Agrium staved off an attack from activist shareholder Jana Partners LLC, ValueAct Capital Management LP revealed it had acquired nearly 8.2 million Agrium shares, or 5.7 percent of the company. Starboard Value continued to press for changes at Wausau Paper even after placing two Starboard directors on the Wausau board, and some companies are dealing with multiple activists at once.
Advantage: Activists
The pace of a hostile campaign is faster today because activists have learned to move very quickly through the phases of information gathering, stock accumulation, escalation and exit. Activists can build their stake under the radar, making their campaigns harder to stop the more shares they own, especially since social media and TV exposure increase the amount and intensity of the pressure they can bring to bear on their targets.
Advantage: Targets
Companies too have learned from the experiences of the past several years. More than anything, they have improved shareholder communications and engagement, soliciting involvement, being respectful of criticism and not dismissing activist arguments out of hand. The best defense against activists is proactive and ongoing assessment of the strengths of the company’s business, management, customer and shareholder support, and the willingness to stand up for the company’s strategy and vision against an activist proposal ─ or consider change when warranted.
Companies also have new mechanisms for monitoring movement in the stock, identifying and addressing potential threats before an activist moves into attack mode. Ownership intelligence can identify a dissident shareholder quietly building a stake in time for the company to react, reach out and avert a hostile conflict.
Shareholder activism is evolving as companies become more open to activist concerns and activists try to mend their hard-edged reputations. In the meantime, we can expect more high-profile campaigns.
John Dexter is Executive Vice President of D.F. King and is responsible for sales across the Canadian enterprise. He also manages the development of the corporate governance platform within the business line. Dexter has over 15 years of experience in capital markets, spending over six years in structured finance in which he executed over $4 billion in transactions. He has a strong knowledge of corporate law and a thorough understanding of the financial markets.
Prior to joining D.F. King, Dexter held the Executive Vice President & General Counsel position at Kingsdale Shareholder Services Inc., where Dexter worked on 22 proxy fights and provided advice to numerous resource companies in terms of corporate governance, shareholder communication and advisory services. In addition, Dexter also has regulatory experience through his tenure at the Investment Dealers Association, Ontario Securities Commission and the Toronto Stock Exchange.
