Some have called this the ‘golden age of activist investing.' Others have described the current climate in a less flattering light, as ‘Investor Activism Gone Wild.’ Pitched battles have played out on a very public stage as high-profile hedge fund managers use media interviews, open letters and even tweets to garner support.
There is no doubt that activist investors have emerged as a significant force in the investment community. According to the Wall Street Journal, just ten years ago activist hedge funds had less than $12 billion under management. Today, that figure exceeds $65 billion. One reason for this rapid growth is that many corporations are now sitting with record amounts of cash on their balance sheets and underperforming stock prices. The activists see opportunities to better utilize capital and increase returns. Rather than waiting for managements to see the light, new activists are seeking to change the outcome. And, in a period when returns on investments have been disappointing, investors have been willing to take greater risks and follow the path of the hedge fund managers.
While the targets of these investors used to be smaller firms in serious financial difficulty, today they have their sights on larger, well-known companies, many of which are household names. Battles have grown so pitched – and so public – that a new group has emerged to promote a healthier dialog between corporate directors and shareholders. Called the Shareholder-Director Exchange, it includes big investors, board members and corporate advisors who are developing a protocol when either side wants to talk. The goal is to help soothe these strained relations before they are played out in the public arena. The project is still in its preliminary stage.
Looking back on 2013, my own list of the ‘Top Ten’ includes both triumphs and debacles. The common denominator is the very high stakes and high visibility nature of today’s activist investing. The list includes:
Dell: Carl Icahn’s bid to derail Michael Dell’s bid to take the company private was called one of the nastiest tech buyouts ever. The billionaire investor used tweets, media interviews and open letters headlining one ‘Let the Desperate Dell Debacle Die.’ Icahn barraged shareholders with his message that the buyout undervalued the company…that Michael Dell should be fired and the board replaced. Dell eventually went private in one of the most difficult tech deals in memory.
Fannie Mae and Freddie Mac: Pershing Square CEO Bill Ackman described his investment in the mortgage giants as one of his most interesting since he acquired General Growth Properties in 2008. He purchased nearly 10% of the common shares in Fannie and Freddie that aren’t owned by the Government. He did not support the plan of Bruce Berkowitz’s mutual fund firm, Fairholme Capital, to spin off the mortgage insurance business. Berkowitz and Ackman’s investments highlight how, in the space of two years, Freddie and Fannie went from taxpayer sinkholes to money makers that investment managers are fighting to privatize.
Sony: Even George Clooney got involved in Daniel Loeb’s effort to get Sony to spin off its entertainment assets. The CEO of Third Point said he wanted greater transparency with less spending on overhead and more on film. Sony rejected the investor’s stock sale proposal.
Herbalife: In what can be called the war of the titans, Bill Ackman was pitted against Carl Icahn. They were joined in the fray by other hedge funds including Dan Loeb’s Third Point and George Soros’ Perry Capital. With Ackman claiming that Herbalife was a pyramid scheme, still others have jumped in. The stock has fluctuated wildly and more than doubled last year as investors sought short-term gains in a gloves-off battle “with little clarity about the truth.”
Proctor & Gamble: Bill Ackman used his investment in P&G to force the company to cut costs and replace the CEO. His strategy had an impact. In May 2013, former CEO Bob McDonald abruptly retired and Ackman made an estimated $485 million on his investment.
J. C. Penney: In a major setback for Pershing Square’s Bill Ackman, his two-year campaign to transform J.C. Penny came to an end when he stepped down from the board. His departure followed the fiasco created by his hand-picked candidate, former CEO Ron Johnson, who failed to lead Penney’s makeover and was fired by the board.
Apple: When Carl Icahn tweeted that he had taken a position in Apple, the stock immediately went up. Seeking to pressure Apple to return cash to shareholders, he claimed that the shares were undervalued and the company should buyback shares quickly. Over a period of weeks, additional purchases brought his total to $3.6 billion. Icahn published a letter to shareholders urging that the company’s buyback be increased and executed faster. Apple recently announced the repurchase of $14 billion of its own shares since reporting financial results that disappointed Wall Street. Then on February 10th, Icahn called an end to his six-month effort in a public letter posted on this website. He claimed victory pointing to Apple’s stock repurchases in recent weeks.
Microsoft: Change is coming to the software giant with the announcement that ValueAct Capital Management gained a seat on the board with its small 0.8% stake in the company. Longtime CEO Steve Balmer soon announced that he would be quitting within a year. The hedge fund wants Microsoft to become more of an enterprise software and business services company. The ValueAct win reflects the growing power of activist investors to advocate for change.
Oracle: Pension plan advisory company CtW Investment Group led the campaign against Oracle’s say-on-pay measure. For the second year in a row, shareholders voted down CEO Larry Ellison’s pay package that made him the highest paid CEO of any company in the world. CtW issued a statement that Oracle directors have failed investors by refusing to address pay concerns.
Transocean Ltd.: Yielding to demands from investor Carl Icahn, Transocean boosted its dividend and cut costs. The company had lost as much as half of its value after the Deepwater Horizon rig explosion. Icahn issued a statement that the company is now on the road to realize its potential.
Activist investors’ targets from 2013 provide a cautionary tale for companies trying to keep activist investors at bay. Boards and managements that fail to explore all the alternatives to unlock the value in their companies leave the door open for others to step in. It is imperative to constantly articulate the company’s strategy for building shareholder value to the financial community and the timeline needed for it to unfold. With strategy clearly set forth, companies will be in a stronger position to defend if activist investors come knocking.