The first half of 2014 has been a strong period for activist investors, but there are signs activism is transforming as market conditions shift, according to a new report from Activist Insight.

Activist Investing Activist stock category Aug 2014

Activist investing doubled between 2010 and 2013

The report notes that activism has more than doubled between 2010 and 2013, and the strategy is up 7.3 percent in the first six months of 2014. In the first six months of 2014 there were 161 activist campaigns, up from 150 over the same period last year.

The first half of 2014 has seen a rise in campaigns targeting small cap stocks, up from 25 percent to 32 percent. Large cap stocks, by contrast, saw a significant drop in activism, down from 15 percent in the first half of 2013 to 8 percent in 2014. The report explains this by looking at Carl Icahn’s campaigns with Apple and eBay, in which he was “not fully satisfied in his demands at either company.”

Activist Insight’s Josh Black, who edited the Half-Year Review: “These trends suggest that even when presented with rising equity markets, activist investors are resourceful enough to find new opportunities. Talk of a peak in activism seems to be an exaggeration.”

US, a prime target for activist investing campaigns

Activist campaigns continued to be primarily taking place in the US, which saw the strongest growth, while strategy strength in Canada and Japan didn’t change much year over year.  In Europe many of the activist campaigns are taking place behind closed doors, according to The Blackstone Group L.P. (NYSE:BX)’s John Studzinski.

Activist Investing Activist strategy type Aug 2014

 

In terms of campaign goals, gaining board seats, governance and mergers and acquisitions all topped the list.  Blackstone’s Studzinski said that activism is becoming “more sophisticated.” Rather than just targeting stock buybacks or enhanced dividends, activists are asking about the company’s five-year plan, Studzinski noted in the report.

Tech sector see a significant drop in activist investing

In terms of activist target market, the tech sector has seen a significant drop in activism, down 36 percent. This follows a pronouncement by Greenlight Capital’s David Einhorn in a first quarter investor letter that “a clear consensus that we are witnessing our second tech bubble in 15 years.”

At this point of the year, the report notes it is too early to determine the relative success of the activist strategy by making year over year comparisons. A total of 86 activist demands are outstanding, “enough to change the finely balanced levels of success and failure,” the report notes. However, 2014 is looking like a strong year, as activists who have either partially achieved their goals or who have reached compromise or settlement with a firm has already outpaced the absolute numbers for the first half of 2013.

To date, 51 percent of concluded activist campaigns have gone in the activists favor, while an additional 12 percent were partially successful, the report noted.

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Below is a brief summary from Activist Insight

Activism continues to grow

  • With 127 public activist campaigns recorded in the US in the first six months of 2014, the level of activism there is likely to surpass that of last year (H1 2013: 114, FY 2013: 207).
  • In a foreword for the Half-Year Review OIshan Frome Wolosky Partners Steve Wolosky and Andy Freedman describe the current climate as “a golden era” for shareholder activism.
  • To date in 2014, Olshan Frome Wolosky’s Equity Investment & ActivistPractice has already surpassed its 2013 totals, delivering 34 nomination letters, negotiating 26 settlement agreements for board representation, filing 32 initial 13D’s, and helping clients achieve board representation at a total of 30 public companies.
  • Activism maintained a steady presence in jurisdictions such as Japan and Canada.
  • In Europe, publicly declared activist campaigns fell slightly from 23 to 19 targeted companies in the first half of 2014, although there were similar levels of activism in the UK, France, Italy, Germany and Scandinavia.
  • Activists are more private outside of North America, so it is hard to draw the conclusion that activism is less prevalent this year.

 

Table 1. Number of companies publicly targeted by activists
Jurisdiction H1 2014 YOY % Change H1 2013
US 127 11.4% 114
Europe 19 -17.4% 23
Canada 6 0.0% 6
Japan 3 0.0% 3
Australia 3 200.0% 1
Other 2 -33.3% 3

 
Large-caps are no longer so popular

  • In 2013, activist launched campaigns at over 40 large-cap companies, nearly twice as many as in 2012.
  • However, this rate of increase slowed in the first half of 2014, with campaigns at large-cap companies falling seven percentage points.
  • That said, the larger proportion of activist investing has always been in the small- and mid-cap space ($250 million to $2 billion, and $2 billion to $10 billion respectively).

 

Table 2. Activist-targeted companies by market-cap
H1 2014 H1 2013
Nano-Cap 12% 15%
Micro-Cap 25% 26%
Small-Cap 32% 25%
Mid-Cap 22% 20%
Large-Cap 8% 15%

 
Activists are moving from the tech sector to services

  • The number of technology companies where activists have launched public campaigns fell 36% between 2013 and 2014, with the news suggesting a partial retreat from campaigns like those at Dell, Microsoft and Apple.
  • However, with eBay, Juniper Networks and Riverbed all in play during the first half of 2014, there may be more to come.
  • Activists have been particularly drawn to companies where the potential for creative schemes involving real estate exists, while also favouring free cash flows.
  • This has led to more campaigns at restaurant chains (6 in H1 2014, against 3 in H1 2013), such as Darden, Bob Evans Foods and The Pantry, and retailers (up to 15 from 6 last year), including Family Dollar and (even more recently) PetSmart.

 

Table 3. Activist-targeted companies by sector
Sector Companies Targeted
H1 2014 YOY % Change H1 2013
Basic Materials 21 -4.5% 22
Conglomerates 3 50.0% 2
Consumer Goods 15 15.4% 13
Financial 24 -11.1% 27
Healthcare 16 45.5% 11
Industrial Goods 15 66.7% 9
Services 42 44.8% 29
Technology 23 -36.1% 36
Utilities 1 0.0% 1

 
Outcomes appear more dominated by settlements
 
It is too early to give a final verdict on many activist campaigns launched during 2014, especially those with more operational demands. Yet early indications show the number of settlements and compromises are up on last

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