Activist investors were certainly busy during the month of February, and it doesn’t look like that has changed this month. Some clear patterns emerged in the action last month as activist firms took up new positions, exited others and pushed on with their previous targets.
Activists abandon Dollar General
The folks at Activist Insight analyzed the latest set of 13F filings and discovered that many of the stocks activist firms took a stake in over the last quarter already had campaigns going on. They noted that several activist firms dumped their Dollar General stakes around the time of the failed bid for Dollar Tree.
Sachem Head also dumped its stake in Allergan after the successful merger agreement with Actavis. Here’s a look at some of the top new positions and exited positions among activist firms during the fourth quarter (All charts and graphs in this article are courtesy Activist Insight.).
Activist Insight noted that many activists seemed to be following each other during the fourth quarter. For example, they wrote that Atlantic Investment Management seemed to be “piggybacking Marcato at Lear.” Also Starboard Value tagged onto Blue Harbour on Clear Harbors.
Activist firms reveal new short positions
[drizzle]There was also plenty of shorting activity among activist funds during the fourth quarter, with Muddy Waters targeting Superb Summit International, Citron Research going after GoPro and Bronte Capital and Kerrisdale focusing on Globalstar. Here are the top new shorts from the fourth quarter:
Trends in activist investing
In this month’s issue, Activist Insight also reported that activist investors are frequently targeting companies in the Services sector and have been doing so since 2010. The publication suggests that one of the reasons Services companies may be so interesting to activists right now is because they can take advantage of the “favorable tax status” offered by real estate investment trusts (REITs) by setting one up to hold their properties.
Here’s a look at the breakdown of activist campaigns according to sector:
Spinoff campaigns picking up steam
Another big trend in activism right now is spinoffs. Carl Icahn’s push for eBay to spin off PayPal came to fruition late last year when management caved to his demands. The separation is expected to be completed this year. Icahn ended up making similar demands to Manitowoc, which agreed to spin off part of its business. His demands are interesting in the way they deal with corporate governance and opening up the SpinCos to potential hostile takeovers.
“The corporate governance reforms sought by Icahn amount to stripping the six companies that will emerge from the division of eBay … and Manitowoc, of takeover defenses that will make it difficult for a hostile bidder to gain control,” wrote Activist Insight. “Manitowoc’s SpinCo and PayPal will also opt out of section 203 of Delaware’s corporate law code, which prevents hostile bidders from taking a large position in a stock and then launching a tender.”
Trian Partners also mentioned Icahn’s tactic at PayPal when it criticized DuPont’s planned spinoff of its Chemours chemical unit. Also Sandell Asset Management told JDS Uniphase that its SpinCo shouldn’t have a poison pill or staggered board—two of the ways companies protect themselves from hostile bids.
Why follow this tactic?
Perhaps the main reason activist investors want to leave SpinCo’s open to hostile bidders is because it makes it easier for another company to come in and force itself upon the vulnerable SpinCo. The idea is often to load the ParentCo’s debt onto the SpinCo, according to Activist Insight.
“If the new stock performs well or is acquired at a premium, and services agreements mean the ParentCo and the SpinCo can share costs or office space for years to reduce expenditure,” writes Activist Insight. “In many cases, one or other party to the transaction attracts a takeover bid.
Mixed success in spinoffs by activist investors
Activist Insight reports that activist firms are having a bit more success in getting companies to sell off some of their assets rather than to spin them off into separate companies. Over the last five years, 20 campaigns for asset sales were successful, compared to 16 for spinoffs:
In spite of the mixed success on spinoff campaigns, it seems unlikely activist investors will stop pushing for them. Former Lehman Brothers tax expert told Activist Insight that this trend does indeed seem to be on the rise because “activists realize that the myth of the ‘two-year embargo’ on sales of spun-off corporations (or for that matter parent corporations is indeed a myth.”
The numbers back up this view also, as a study conducted by The Edge Consulting Group and Deloitte indicates that the number of completed spinoffs per year has been rising, with 2014 seeing a huge spike compared to the previous year:
For activists who are angling for a spinoff, what’s their end game? To figure this out, the folks at Activist Insight considered the likelihood of the activists holding onto shares of the parent company’s stock. Until now, they were more likely to hold onto the stock rather than shares of the spun-off company.
The publication found that 39% of activists exited the parent company before the spinoff was completed: