Activism has dramatically increased in popularity as a way to squeeze more value out of public companies, and this is a trend that’s not going away anytime soon. Activist investors like Carl Icahn and Bill Ackman wield the power of (unadmitted) fear over managements as they take over a role that once was a major strategy of private equity firms.
Interestingly, activism now shares a lot of features with past PE firm strategies, increasing the number of sharks circling in the public waters. So do activists and PE firms work together like activists and mutual funds are increasingly starting to do, or are PE firms battling activists for targets?
PE firms yield to activism
In many cases, it seems as if PE firms have themselves begun to adopt some activist strategies, according to the folks at Activism Insight. Their latest edition of Activism Monthly Premium explores the slight differences and major similarities in the strategies employed by activist invests and private equity firms.
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Indeed, PE firms were once the investors to fear, but following the global financial crisis, activism began to rise in popularity and take over the position once held by PE firms. Activist Insight interviewed Geoff Sorbello of Houlihan Lokey, an investment bank. He described both activist investors and PE firms as "value-dislocation type investors," adding that companies which make good targets for activists "are also often good candidates for go-private transactions."
Are activists starting to step on PE firms' toes?
Sometimes it seems as if activist investors are starting to wage a turf battle with PE firms as leverage buyouts have dropped off dramatically since their peak in 2007 at $267 billion. Also activists tend to oppose go-private transactions because they see more value in private equity targets, notes Activist Insight.
On the other hand, Sorbello also points out that some activists still target buyouts as part of their campaign, although Vanguard, BlackRock and some other activist firms aren't always happy with that strategy being the only agenda of activists.
A price floor for stocks
There's been a lot of debate about whether activism actually creates or destroys value in companies, although it really depends on the campaign and what the ultimate goal of the activist is in each particular case. Some believe value investors are attracted to activist targets because they sometimes have a floor on their stocks as a result of being targeted.
PE firms face restrictions not put on activists as a result of the post-crash regulations which stipulate certain leverage ratios at such firms. This could be a reason activists are emerging as a force that is to be feared more than PE firms.
Activist, PE strategies meet in the middle
Richard Brand, an attorney with Cadwalader Wickersham & Taft who specializes in activism and PE firm strategies, isn't surprised that there is a growing convergence between the strategies employed by both types of investors. He noted that often their goals and strategies are similar, especially because many activists are starting to focus more on making changes at the operational level.
Here's a look at some of the major campaigns in which activism has converged with PE firm strategies (All charts/ graphs in this article are courtesy Activist Insight/ Activism Monthly Premium.).
Activism now brings better results
Over the last five years, Activist Insight has found that more and more activists are starting to focus on cost-cutting initiatives, mergers and acquisitions, and closing underperforming divisions. Some have even prepared themselves to make takeover bids, although they have found that the record of this strategy isn't encouraging.
PE firms have historically focused on creating relationships with the management of the company they target, but the results of this strategy appear to be weakening.
Do activists compete with PE firms?
Because of the similar targets and strategies employed by activist investors and private equity firms, it's unsurprising that the two often interact with each other. Indeed, Activist Insight spoke with Ele Klein of Schulte Roth & Zabel, who said often those interactions are cooperative rather than competitive in nature.
Data from Activist insight indicates that in nearly 18% of all the M&A exits by activists were through a PE buyout since 2010. For example, last year JANA Partners pressured PetSmart to sell itself to a PE firm, resulting in the year's biggest buyout. Also last year, Safeway went private.
How PE firms and activists can help each other
But while activists seem to partner with private equity firms often enough, the data suggests that PE firms do not reciprocate, meaning that there just doesn't appear to be evidence of it. One example which doesn't fit this pattern is Thoma Bravo's apparent following of Elliott Management. However, there are signs that PE firms share ideas with activist investors, according to Klein, often because PE firms are restricted in their ability to wage proxy battles or make hostile bids.
Despite the restrictions placed on private equity firms, they do have some advantages over activists, according to Activist Insight. Investors seem to recognize this, as globally, PE firms "raised an average of $330 billion a year between 2010 and 2014," the media outlet reports, citing data from Private Equity International. Activists, on the other hand, raised about $308 billion.
Also PE firms are usually more patient when waiting for results from the companies they target. They are also often more willing to sign non-disclosure agreements, and managements are usually more likely to work with them rather than against them, as they often oppose activist investors, according to Activist Insight, which cites people familiar with these types of situations. Activists usually want to keep their options open so that they can sell out of their positions quickly if they feel the need to do so.