The Activist Investing Annual Review 2017
New York, February 1, 2017 — The Activist Investing Annual Review 2017, produced by Activist Insight in association with Schulte Roth & Zabel (SRZ) was released today, analyzing 2016 trends in shareholder activism, ranking the “Top Ten” activist investors and providing predictions for the year ahead.
Highlights from the review:
The Talas Turkey Value Fund returned 9.5% net for the first quarter on a concentrated portfolio in which 93% of its capital is invested in 14 holdings. The MSCI Turkey Index returned 13.1% for the first quarter, while the MSCI All-Country ex-USA was down 5.4%. Background of the Talas Turkey Value Fund Since its inception Read More
- Activists targeted 758 companies worldwide in 2016, a 13% increase from 2015’s total of 673.
- The number of companies facing public activist demands outside the United States surged to 302 in 2016, up from 255 a year before, driven by greater interest in Asia and opportunities created by volatile European currencies.
- In 2016, the number of companies targeted by activists rose 9% in the United States, 35% in Europe and 48% in Asia.
Click here for a PDF of the review.
Marc Weingarten and Eleazer Klein, SRZ partners and co-chairs of the firm’s global Shareholder Activism Group, contributed expert commentary to the review. The publication also features Jim McNally, London-based shareholder activism, corporate and funds partner, and Michael E. Swartz, New York-based litigation partner who advises on shareholder activism litigation.
SRZ is well-known for its premier, market-leading practice handling all types of shareholder activism situations, from the straightforward to the most complex and sophisticated campaigns. In January 2017, leading shareholder activism lawyer Aneliya S. Crawford joined SRZ as a partner in the New York office. She has represented activist investors in connection with more than 100 major shareholder activism campaigns, including many high-profile matters.
Addressing the review’s findings, Mr. Weingarten commented, “The large caps are recognizing that activism is here to stay, and many have proactively taken the steps to enhance shareholder value that an activist otherwise might have sought.” Mr. Klein added, “Companies are also examining campaigns more closely and checking more frequently with the institutional investors to see what they want.”
Activist Insight’s Josh Black, editor of the review, outlined some of the obstacles investors are facing. “With markets rallying, interest rates rising and a number of regulatory initiatives designed to clip their wings, 2017 could be another challenging year for activists,” he said.
“Together with Activist Insight, we are pleased to present this report. This annual publication serves as a valuable resource for key players in the activism market,” stated Alan S. Waldenberg, chair of SRZ’s Executive Committee.
The Activist Investing Annual Review 2017 also features “The Activist Top Ten,” with Elliott Management topping the list for the second year in a row. Activist Insight selects the list based on the number of campaigns, average size of targets, news stories generated and annualized returns.
“The Activist Top Ten 2016” are:
- Elliott Management
- Starboard Value
- Carl Icahn
- Corvex Management
- GAMCO Investors
- Mangrove Partners
- Allan Gray
- Amber Capital
- Bulldog Investors
- Teleios Capital Partners
Onward and upwards
Marc Weingarten and Eleazer Klein, co-chairs of Schulte Roth & Zabel’s global Shareholder Activism Group.
A change in the mix
While activist campaigns may not have commanded as many newspaper front pages in 2016 as they have in recent years, this reflected more of a down-market shift in activist targets and not any retreat by shareholders. Many activists focused on smaller targets during the year, while some of the largest and most-feared activists had a quieter year retrenching in the aftermath of lesser performances in 2015. Nonetheless, the number of activist investments across the globe actually slightly increased versus the previous year, although there was a slight decline in North American volume.
There were a myriad of contributors to this pause in the growth of shareholder activism. Many of the major activist funds had their first down years in 2015, led in some cases by the collapse of Valeant’s stock and poorly-timed energy bets, and their losses continued into the first quarter of 2016. As a result, they were more focused on investor relations and increasing liquidity than taking on new large cap campaigns (with Elliott and Starboard Value being major exceptions). The uncertainty resulting from the “Brexit” bombshell and the U.S. election also slowed activity. But much of that macroeconomic uncertainty has now been resolved, with Brexit going “hard” and the Trump administration firmly in place, and with more positive returns for the major activists during the balance of 2016 and their investor base stabilizing, we are expecting more action in the large cap space this year. With the newlyensconced Paul Hilal pursuing CSX, this trend is already underway.
Rise of the occasional activist
As “reluctivists” have been emboldened by the success of activist investors, the occasional activist is becoming a more familiar sight. More and more investors who would never call themselves activists have entered the activism arena. Occasional activists are almost always long-term investors in their targets and typically have engaged with management for many months – if not years – before resorting to the activist playbook. Investment managers fed up with a portfolio company’s management and lack of progress have recognized that activist engagements can be a useful tool to catalyze the changes needed to deliver returns. These funds often believe that their role as fiduciaries for their investors requires them to sometimes pursue an activist strategy, instead of simply disinvesting. Our clients Altimeter Capital, with a successful campaign at United Airlines, and St. Denis J. Villere & Company, which pushed Epiq Systems to a sale, typified the sector. And 2016 saw several more traditional managers turn into occasional activists, like Neuberger Berman at Ultratech and T. Rowe Price at NetSuite.
Redefining proxies in the United States
In 2016, the Securities and Exchange Commission released a long-awaited proposal for universal proxies at the behest of our client, the Council of Institutional Investors.
The proposal would require the use of universal proxies in election contests, in order to enable shareholders to vote for the combination of board nominees of their choice and replicate the action they could take by attending a shareholder meeting in person. While activist defense advisers have reactively decried universal proxies as tilting the playing field to favor activists, which in fact is not the case, they would certainly change the dynamics in proxy contests. With the change in administrations, and at the SEC, it remains to be seen whether this proposal has legs.
Back on the growth track
So following a bit of a pause last year, we see the activist sector returning to its historic growth trajectory, not just in the United States but on a more global basis as well. And preparing for that growth, we welcome our new partner, Aneliya S. Crawford, to our activist team at Schulte Roth & Zabel. Onward!
Hype and humility
Shareholder activism proliferated in 2016, but dedicated activists were responsible for fewer than half of global campaigns thanks to volatility and smaller war chests, reports Josh Black. Getting heard above the crowd may be harder in 2017.
The juggernaut of shareholder engagement kept rolling in 2016 as a surge of one-off campaigns, governance-related proposals and remuneration crackdowns made for a busy year. 758 companies worldwide received public demands – a 13% increase on 2015’s total of 673 – including 104 S&P 500 issuers and eight of the FTSE 100. Yet for dedicated activist investors, it was a more muted affair. Investors deemed by Activist Insight to have a primary or partial focus on activism targeted fewer and smaller companies, accounting for just 40% of the total which faced public demands, and 10% fewer companies in North America. Turbulent markets, redemptions and competition all played a part in reducing the volume of activist investing. By contrast, shareholder engagement flourished.
“Investors deemed by Activist Insight to have a primary or partial focus on activism targeted fewer and smaller companies, accounting for just 40% of the total which faced public demands.”
With hangovers from poorly timed investments in energy markets, the near-demise of Valeant Pharmaceuticals International and antitrust concerns breaking up deals on which activists had bet substantially, dedicated activists enjoyed a particularly poor start to the year in the U.S. Jason Ader, the CEO of SpringOwl Asset Management, told Activist Insight for this report that 2016 might be “the year that activists were humbled.”
However, the number of newly engaged investors suggests the feeling is not widespread. According to Activist Insight, 51 primary, partial or occasional focus U.S. investors founded since 2009 launched their first U.S. campaign in 2016, up from 38 the year before. Although the data include recently founded activist firms, the universe of activists is expanding rapidly.
Indeed, engagement activists, typically institutions or individuals that push for governance changes, targeted 155 companies worldwide in 2016 – up 24% after three years in which activity had remained flat. But it was “occasional” activists – which do not include activism as part of their regular investment strategy but which make infrequent public criticisms of portfolio companies – that account for the highest volume, making demands at 311 companies.
Not all of these demands trouble management equally. Only 58% of resolved demands initiated in 2016 were at least partially successful, with the rate of achievement rising with the focus level of the activist. That rate may yet fall as campaigns are resolved, with 2014 and 2015 both posting around 53% at least partially successful.
One of the most notable trends of the year was the strengthening of small cap activism, at the expense of the large targets activists have increasingly pursued. While the number of targeted companies
valued at more than $10 billion rose marginally overall, among primary and partial focus activists it fell from 44 in 2015 to 30 last year. Indeed, in 2016, the sub-$2 billion market cap arena accounted for 78% of all targets, up from 72% in 2015 and 70% in 2014. After mixed results, Ader says he is unlikely to repeat his PR-heavy campaigns at Viacom or Yahoo, where SpringOwl published lengthy presentations in 2016.
That may continue to be a trend this year, unless activist fundraising picks up substantially. Assets under management of primary focus funds globally fell from $194 billion in 2015 to $176 billion – still higher than in 2014, but their first drop in five years.
Despite the tough climate, activists are still raising funds – SpringOwl and long/short specialist Spruce Point launched new ones, while Hudson Executive Capital and Marcato Capital have had some success with prior launches. Co-investment, meanwhile, remains a favored strategy for both new and old activists.
Major activists were undoubtedly preoccupied – Icahn by bearishness, Trian Partners by several new positions taken a year previously, and Pershing Square Capital Management by turning around Valeant, although Ackman’s fund did participate in overhauling the board of Chipotle Mexican Grill late in the year. If all three become more prolific in 2017, large caps could yet face renewed scrutiny.
Activism in the technology sector was proportionately flat for the third straight year, this despite activity that ensured it remained one of the most publicized areas, including Starboard Value’s brief threat of a full board contest at Yahoo before a settlement was reached. M&A continued to provide activists with an exit strategy in the sector, including for Elliott Management targets EMC, Infoblox and Qlik and other companies such as Epiq Systems (Villere & Co) and Outerwall (Engaged Capital).
Moreover, a post-election rally notwithstanding, activists that have made their living focusing on buyouts in the sector – Elliott and Viex Capital among them – are unlikely to suffer a drought, according to Evercore’s Bill Anderson.
Financial stocks have also been facing the heat, with volume up 28% in the U.S. and 15% globally. Proxy contests at FBR & Co and Banc of California stand out, while a rally in such stocks after the November election of Donald Trump to the presidency of the U.S. may portend more M&A among small banks and property and casualty insurers, Anderson added in an interview for this report.
“Among primary and partial focus activists, the sub-$2 billion market cap arena accounted for 78% of all targets, up from 72% in 2015 and 70% in 2014.”
The next frontier
Bullish M&A markets have allowed activists to play “bumpitrage” by seeking higher offers from previously announced deals. After Britain voted to leave the European Union, a host of such mergers were exposed to calls for re-evaluations by disgruntled shareholders, as at SABMiller and Poundland in the U.K. In Europe, Elliott Management took up holdout stakes in XPO Europe and Ansaldo, while Paris-based Charity Investment Asset Management has also specialized in defending minority investors in controlled companies.
Getting a hearing became easier in Europe in 2016, with Rolls-Royce Holdings becoming the first FTSE 100 company to cede a board seat to an activist (ValueAct Capital Partners) and Active Ownership Capital winning a seat at Stada in a rare German proxy contest. Whether similar trends emerge in regions where the culture of shareholder activism remains underdeveloped, such as Asia and Australasia, remains to be seen. Back in the U.S., if securing a hearing becomes more of a challenge again, it will be due to the spread of activism, not the lack of it.
The Activist Top Ten
Each year Activist Insight creates a ranking of the most influential activists over the past year, based on the number, size and performance of their activist investments, showcasing the information available on the Activist Insight Online database. The following categories have been used to create a points-based ranking for this year’s list: number of companies subjected to public demands, average market capitalization of targeted companies, average 2016 annualized Follower Return of companies subjected to public demands, and news stories written about the activist on Activist Insight Online in 2016. To qualify, an investor must be a primary or partial focus activist under Activist Insight Online’s classification and have publicly targeted three or more companies in the past year.
1. Elliott Management
For the second year in a row, Elliott Management leads Activist Insight’s coveted ranking of influential activists. Spurred by its unflagging focus on the U.S. technology sector and campaigns run from offices around the world, Elliott also becomes the first activist to top the table twice.
In many ways, the accolade is not surprising. When many competitors had quiet years, Elliott continued to find an almost unparalleled number of opportunities. It made public demands at 14 companies in 2016 – a slight slowdown on 2015’s 18, but higher than any other activist. Ripples from its opposition to the 2015 merger of Samsung C&T and Cheil Industries led to a corruption scandal involving the National Pension Service’s voting that brought down the South Korean president, encouraged the formulation of a corporate governance code and made Samsung Electronics, its next campaign in the country, a far more obliging target. Many an elected official must dream of such impact.
Behind Elliott’s growing influence is an ongoing effort to refine the fund’s process of identifying and unlocking hidden value, Senior Portfolio Manager Jesse Cohn told Activist Insight in an interview for this report. “Our process requires us to get deep into operations – to be able to explain the value to a wide range of stakeholders,” he added.
Such explanatory powers allowed Elliott to win a quick victory at Marathon Petroleum, which recently announced it would implement many of the activist’s suggestions to enhance value at its master limited partnership, MPLX. Elsewhere, a campaign at Samsung Electronics and holdout positions in XPO Europe and Ansaldo STS boost the average market cap of its targets to nearly $26 billion, even though the size of the fund allows it to remain effective in the small and mid cap space.
“We don’t aspire to a certain number of campaigns, but we do aspire to be consistent in our approach to each investment,” Cohn explains. That means a playbook historically employed at small technology companies can be employed at consulting businesses, oil exploration and production firms and retailers.
All of which makes the outlook bright for this activist at least – something not lost on Cohn. “We don’t see any overall decline in opportunities whatsoever,” he concludes. “Some kinds of opportunities have gone away, but those have been replaced by others.”
2. Starboard Value
By Starboard Value’s standards, 2016 was a quiet year. In those twelve months it forced the sale many before it had failed to achieve at Yahoo, brought Office Depot and Staples together in a merger agreement that was only stopped by antitrust regulators, branched out into pharmaceuticals and even energy, briefly, for the first time, and successfully wound down its historic position in Darden Restaurants. Overall, the number of companies at which it pushed for change rose from seven in 2015 to eight last year, and a less contentious approach also meant many demands went unreported.
Reports of a respectable set of returns for the year are borne out by Activist Insight’s stock tracking Follower Returns feature. Although some stocks, such as Perrigo and Macy’s, have struggled, other positions at Marvell Technology and Depomed have quickly earned profits.
In 2017, the big question may be whether Starboard continues pursuing the big names or pivots to smaller companies. In recent months it has increasingly focused on situations already in play, such as Stewart Information Services, Fiesta Restaurant Group and Cabela’s. As a powerful broker, Jeff Smith’s fund can play quite the role.
3. Carl Icahn
At the beginning of 2016 it seemed just as unlikely that veteran activist Carl Icahn would have a government role as he would be betting $1 billion on the continued rise of stock markets. Yet 0the bearish investor made a bet on the presidential hopes of Donald Trump that gives him access lobbyists would kill for, and a role in picking crucial government appointees – including to the Securities and Exchange Commission and the Environmental Protection Agency.
If Washington business keeps Icahn busy, CEOs can rest a little easier. Icahn only made public demands at three companies in 2016, down from seven the year before, and seemed to go easy on Allergan. There were notably few bright spots in his portfolio save for Chesapeake and Freeport-McMoRan, both of which were recovering from near-death experiences. As a result, Icahn’s investment fund – 138% net short – was down 20% in 2016.
While many will be watching to see what happens with Herbalife, Icahn is likely to focus on integrating his automotive segment after taking Federal-Mogul private, stripping down American International Group, and potentially spying an exit from the separated Xerox companies.
4. Corvex Management
In a year of distractions, Keith Meister’s fund had an investment nightmare at Williams Companies, as merger partner Energy Transfer Partners elected to back out of a merger and as directors decided against pursuing alternative transactions. That left Meister fuming, to the extent that he filed papers to replace the entire board, but a handful of changes led to the former Icahn lieutenant dropping his demands.
Elsewhere, however, Corvex saw greater success. Bayer and Monsanto shareholders approved a combination of the two agrochemical giants, while Yum Brands completed the spin off of its China division after giving Meister a seat on its board at the end of 2015. Meister’s men were reportedly also pushing Time Warner to sell up but said little in public.
Going into 2017, Meister remains one of the most well-funded of the new generation of activists, and will likely want to see movement at portfolio company Pandora. Corvex also holds large stakes in Fidelity National Financial and Signet Jewelers, according to its latest disclosures. A quiet year by its standards in 2016 makes 2017 one for Corvex to show its mettle.
5. Gamco Investors
Gamco Investors matched the eight companies at which it made public demands in 2015 last year, proving there is little shortage of opportunity in the small cap range. Perhaps most notably, Mario Gabelli’s firm was one of the few to stand up to Carl Icahn at Federal-Mogul Holdings, opposing a tender offer until the majority holder increased his offer to squeeze out minority holders from $7 to $10 per share – even though Gamco had asked for $13.
Gabelli was also outspoken throughout the year at Viacom, and had less successful run-ins with Superior Industries International, where Gamco lost its fourth consecutive proxy fight, and National Fuel Gas, which rejected Gamco’s proxy access nomination on the grounds that the mechanism was only for shareholders who owned stock for the purposes of investment only, ruling that Gamco had sought to influence control of the company or its assets.
Gamco’s stock picking was successful, however. Companies it made a public demand at rose 31% on an average annualized basis.
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About Activist Insight
Since 2012, Activist Insight (www.activistinsight.com) has provided its clients with the most comprehensive information on activist investing worldwide. Regularly quoted in the financial press, Activist Insight is the trusted source for data in this evolving space. In 2016, Activist Insight launched Activist Insight Shorts after acquiring Activist Shorts Research. Activist Insight offers four great products: Activist Insight Online, Activist Insight Shorts, Activist Insight Monthly – the world’s only magazine dedicated to activist investing, and Activist Insight Vulnerability – a tool for identifying potential activist targets.
About SRZ’s Shareholder Activism Group
SRZ recently advised: Elliott Management in connection with its interactions with Marathon Petroleum Corporation, a major petroleum refining, marketing and transportation company; JANA Partners in entering into a cooperation agreement with Harris Corporation, a leading technology, defense contractor and information technology services provider; and Altimeter Capital Management in its successful shareholder activist campaign at United Continental Holdings, the parent company of United Airlines. To visit SRZ’s Shareholder Activism Resource Center, click here.
About Schulte Roth & Zabel
Schulte Roth & Zabel LLP (www.srz.com) is a full-service law firm with offices in New York, Washington, D.C. and London. As one of the leading law firms serving the financial services industry, the firm regularly advises clients on corporate and transactional matters, as well as providing counsel on regulatory, compliance, enforcement and investigative issues. The firm’s practices include: bank regulatory; bankruptcy & creditors’ rights litigation; broker-dealer regulatory & enforcement; business reorganization; complex commercial litigation; cybersecurity; distressed debt & claims trading; distressed investing; education law; employment & employee benefits; energy; environmental; finance; financial institutions; hedge funds; individual client services; insurance; intellectual property, sourcing & technology; investment management; litigation; mergers & acquisitions; PIPEs; private equity; real estate; real estate capital markets & REITs; real estate litigation; regulated funds; regulatory & compliance; securities & capital markets; securities enforcement; securities litigation; securitization; shareholder activism; structured finance & derivatives; tax; and white collar defense & government investigations.