Activist investors like Bill Ackman and Carl Icahn have been hard at work targeting companies they believe aren’t performing as well as they should be. In fact, 2014 was an exceptionally busy year, and it looks like 2015 will bring more of the same.
Activist investing: the great debate
But do activist investors do more harm than good? Of course it depends on who you ask.
Marty Lipton of law firm Wachtell, Lipton, Rosen & Katz posted an article entitled “The Threat to Shareholders and the Economy from Activist Hedge Funds” on Harvard Law School‘s Forum on Corporate Governance and Financial Regulation. Without directly naming Ackman or Carl Icahn, he essentially took a swipe at them—or at least their style of activism. And this isn’t the first time he’s come out against Ackman and Carl Icahn.
This time around, Lipton collected a list of all the major viewpoints of those who oppose public activist campaigns, and that list is quite long. What’s missing from his list, however, is the viewpoints of those who’ve written in defense of activism, and there are probably just as many of them.
But it’s important to recognize and distinguish between the two different types of activist campaigns.
“The year of the wolf pack”
He said 2014 could essentially be called the “year of the wolf pack” because of how many activist investing campaigns were active. Specifically, he’s writing against campaigns from those who pander to the press by seeking widespread publication of their activities.
There is certainly something to be said about these types of campaigns, as they speak to a certain human desire for excite. In some cases, they’re like a train wreck. We just can’t look away.
Unfortunately they also do something else, and that’s manipulate the markets (whether intentionally or not). Of course no activist investor would ever say they’re trying to move the shares of the companies they’re targeting, but it’s a natural effect.
Investors hear that Bill Ackman or Carl Icahn is up to something, and they want in because they often get things done. But the Ackmans and Icahns of Wall Street know others sit up and take notice when they speak. So it’s natural for some to question where their pure aims to get big companies back on track end and where their appetite for profits begins.
Bill Ackman, Carl Icahn: Activism behind the scenes
There was so much activist investing going on in 2014 that activist investors even began to take swipes at each other. Icahn decried Ackman’s activist tactics, while Jeffrey Ubben of ValueAct Capital called the tactics of some “corrupt” and even said Carl Icahn appeared to just be “entertaining himself rather than creating long-term value for shareholders” in the case of eBay and PayPal.
Indeed, there seems to me something respectable about the campaigns launched by activists like Ubben. Working behind the scenes can get things done without always resulting in share price manipulation. Of course it depends entirely on whether the firm can keep what it’s doing behind the scenes under wraps, which doesn’t always happen.
Institutional investors against activist campaigns
A number of large institutional investors and non-activist hedge fund managers have also voiced concerns about the rise of activist investors. For example, Vanguard’s William McNabb has said he supports the more low-key approach rather than public campaigns. GMO Capital’s James Montier, Capital Group’s Tim Armour and others also expressed concerns about the practices of activist investors.
Lipton closed his article by calling for major institutional investors to stop supporting activist hedge funds. He also said he would like to see “legislative, regulatory and judicial actions to dampen their abuses and lessen substantially their impact.”