Does Shareholder Activism Drive Outperformance? by Andrew Birstingl, Research Analyst – FactSet
After a record-setting year for activism in 2015, activist investors are showing no signs of slowing down in 2016. So far this year (through August 4), 207 activist campaigns were launched against companies incorporated in the United States, which is only slightly off the pace set last year through the same time period (214 campaigns). When it comes to shareholder activism, one topic brought up regularly is the effect that activists ultimately have on the target company’s stock price. Here, we analyze the shareholder return of the target company prior to the activist’s arrival, through the duration of the campaign, and after its completion.
To perform this analysis, FactSet studied 269 completed activist campaigns launched by members of the SharkWatch50 from the beginning of 2010 through August 4, 2016. These activist campaigns focused on target companies that exceeded $500 million in market capitalization at the time of the campaign. The SharkWatch50 is a compilation of the fifty most significant activist investors as chosen by FactSet. Inclusion in this list is based on several factors, including the number of publicly disclosed activist campaigns waged (with an emphasis on recent activity), as well as the ability to affect change at targeted companies.
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Price Pop from Activist Arrival
The activist arrival date (i.e., campaign announcement date) refers to the date of a press release, Schedule 13D, or other SEC filing announcing the activist has engaged the company. Some investors may view activist engagement as a positive, especially if the target company’s stock has been struggling as of late. Of the activist campaigns tracked by FactSet for this analysis, 82% saw the stock of the target company increase in value one day prior to the arrival of the activist investor to one day after the arrival. The average shareholder return during this window (going back to the start of 2010) was 3.9%, with a return of 5.9% in 2016. At the sector level (using FactSet’s sector classifications), the Retail Trade group saw the largest shareholder return on average (when looking at sectors with at least ten campaigns).
Target companies in the Retail Trade sector saw an average return of 5.4% one day prior to the arrival of the activist to one day after the arrival. The biggest positive mover involved the campaign launched by JANA Partners on PetSmart in July 2014. The stock of the pet products retailer increased 15.3% upon the activist’s arrival.
The end date of an activist campaign refers to the date a proxy fight ended,went to a vote (if campaign was a proxy fight), or the date a logical conclusion to the campaign was reached (if campaign was a non-proxy fight). Of the completed activist campaigns tracked by FactSet for this analysis, 57% saw the stock of the target company increase in value from the activist’s arrival to the end of the campaign. Keep in mind that the length of an activist campaign can vary. When measuring performance on a relative basis against the S&P 500 Total Return index, only 44% of campaigns saw the target company outperform the index during the campaign period. When measuring the average shareholder return against the return of the target company’s related FactSet industry classification, it was a similar story. Only 47% of activist campaigns saw the target outperform its industry peers during the duration of the campaign period.
Although less than half of the targeted companies outperformed on a relative basis during the campaign length, the average shareholder return of the target exceeded that of the S&P 500 and its industry peers. The average shareholder return of the target through the campaign period (for campaigns going back to 2010) was 7.4%, compared to the 5.7% average return of the S&P 500 Total Return Index, and the 5.1% return of the associated FactSet industry classification. So far in 2016, the average return has fared even better than history has suggested. Shareholder returns this year for the target company averaged 12% during the length of the activist campaign, while the S&P 500 and related FactSet industry returned 4% and 4.7%, respectively. In 2016, the largest shareholder return of a target company involved the campaign launched by Starboard Value on Insperity in March. The stock of the human resources and business solutions company increased 37.4% during the campaign.
Going back to the start of 2010, the target company that experienced the largest gain during the length of an activist campaign was Netflix back in 2012. Icahn Associates had disclosed a nearly 10% stake in the entertainment company in late October 2012. The campaign ended approximately a year later with Icahn reducing its stake, but only after the company’s shareholders saw a return of 307%.
No Clear Trend of Outperformance by Targeted Companies Post Campaign
Proponents of shareholder activism may argue the tactic is positive because activist investors may be able to engage with a company’s management and board and eventually help them unlock and maximimize shareholder value in the long term. To determine if a target company’s stock price benefits from activist involvement, FactSet analyzed the shareholder return of the target from the activist arrival date to one year and three years after the campaign end date.
Of the completed activist campaigns tracked by FactSet for this analysis, 71% saw the stock of the target company increase in value from the arrival to date through one year after the completion of the campaign. Campaigns with less than one year of stock price data from the activist arrival date through August 4 were excluded from the analysis. When measuring shareholder return on a relative basis against the S&P 500 Total Return index, just 43% of campaigns saw the target company outperform the index one year after the campaign.
The percentage improved when the companies’ industry peers were used as the benchmark, but not by much. Approximately half of the activist campaigns in this study saw the target company’s stock outperform its associated industry from the activist arrival date through one year after the campaign. The average shareholder return for the target company one year post-campaign (going back to 2010) underperformed that of the S&P 500 index and the FactSet industry by 1.7 percentage points and 1.9 percentage points, respectively. The absolute returns are shown in the chart below.
When looking at performance from the activist arrival to three years after the campaign, 72% saw the stock of the target gain in value across this time period, while the percentage of campaigns in which the target outperformed the S&P 500 index and its FactSet industry amounted to 42% and 49%, respectively. Campaigns with less than three years of stock price data from the activist arrival date through August 4 were excluded from the analysis. The target company involved in the activist campaign (going back to 2010) narrowly outperformed the S&P 500 index in terms of average shareholder return from the activist arrival date through the three years post-campaign. The target beat the S&P 500 over this time frame by 0.5 percentage points on average and beat the related FactSet industry by 5.1 percentage points. The absolute returns are shown in the chart below.
Individual Campaign Success
Based on this analysis, it is difficult to identify any clear and consistent trend in the stock performance of companies targeted by activists. A logical conclusion may be that the details of each activist campaign and targeted company must be considered on an individual basis. The tables below show the top five activist campaigns (going back to 2010) ranked by the shareholder return of the target company through the duration of the campaign, one year after the campaign, and three years after the campaign. Icahn Associates and Starboard Value have dominated these rankings, especially as it pertains to the shareholder return of the target company post-campaign.
Icahn Associates has seen the average shareholder return of its target company outperform the S&P 500 and the related FactSet industry classification by 18.7 percentage points and 14.7 percentage points, respectively, from the activist arrival to one year after the completion of the campaign. Starboard Value has seen the average return of its target company outperform the S&P 500 and the related FactSet industry by 60.7 percentage points and 54.8 percentage points, respectively, from the activist arrival to three years after the end of the campaign. Additionally, Icahn Associates and Starboard Value have completed the most activists campaigns out of the SharkWatch50 members going back to 2010 (38 and 29 campaigns, respectively).
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