Don’t look back in anger; it’s not too late. Those waiting eagerly for 2018’s big activist target to be revealed may be in for a disappointment. Thanks to rising markets and a higher bar for institutional investors supporting activism, this could be a year reaching into the past.
Many of the biggest activists are grappling with names that have sat in their portfolios for some time. Elliott Management is said to be lining up a second proxy contest at Hess, five years on from its first (and has until March to make nominations). Trian Partners is helping General Electric’s new management run a no-holds-barred review of the conglomerate and Nelson Peltz also said last week that the fund thought there would be more to come from Mondelez as it approaches six years as a shareholder. Bill Ackman has said his Pershing Square Capital Management will be back at Automatic Data Processing if reforms stall.
For J. Daniel Plants, the chief investment officer of Voce Capital, an old idea can be just as profitable as a new one, especially after a long bull run in the markets. While the occasional activist insists there are plenty of opportunities within his midcap universe, he told Activist Insight in a recent interview, “The safest place to look for alpha is in your own portfolio.”
“Activism around positions we've been a longtime investor in, or in sector areas we're more experienced in, has generally led to better outcomes,” the San Francisco-based fund manager, who returned 19% net of fees in 2017 according to people familiar with Voce’s operations, said last week.
“If you have a choice of two doors, and door A is something you don't know as much about and door B is something with which you are intimately familiar, I'll usually take door B. Even if you've stubbed your toe a few times on door B, it feels inherently less risky to try to open and walk through it than does door A” he explained.
This wasn’t always the way. A succession of activists took turns at Yahoo, rather than stick around to ensure a resolution of the internet company’s problems. Starboard Value once made a point of running consecutive contests at some of its holdings, but since its full board sweep at Darden Restaurants in 2014 has barely needed to fight (this week’s announcement at Mellanox Technologies notwithstanding).
With “best idea” segments at investment conferences getting drier each year, however, activists may be about to go back to the future.
Predictions from the adviser community regarding “second wave” activism have largely focused on management changes, which tend to be more surreptitious than second proxy contests or letter-writing campaigns. Now that exclusively short-term demands such as leveraging up to repurchase shares or selling the company are looked on with suspicion by governance teams at institutional investors, activists may be under pressure to spend a longer time guiding a company through deeper strategic or operational changes. Plus, they may also be incentivized to start holding positions longer when new carried interest rules take effect in 2019. Both factors, combined with high valuations, could increase the incidence of old positions becoming news in the year to come.
Yet that need not be a disadvantage for activists, says Plants. Deeper industry experience, greater visibility into risk factors and mutual familiarity between investors and management teams all point to a more productive relationship, as evidenced by a proxy contest at Air Methods that Voce ran last year.
Voce initiated a position in air ambulance operator Air Methods in September 2011, agitated publicly in 2015 and entered a standstill the following year, so its views hardly caused a great shock when it resumed pushing for a sale in February last year. The company issued a relatively demure press release, “recogniz[ing] the right of investors to nominate directors,” and offering to review Voce’s nominees before selling itself to American Securities for $2.5 billion a month later. Throughout, the company “maintained a level of professional decorum that we haven't always seen previously,” Plants says.
Perhaps management knew a sale was in the works and ran down the clock, but the investor maintains that the campaign was played with ‘flag football’ rather than full contact rules, “without one unkind word or cheap shot taken.” That is how it should be, he noted approvingly.
Lots of discussion this week has stemmed from BlackRock CEO Larry Fink’s annual letter to CEOs, among the best takes being these from Joe Nocera, Felix Salmon and Wachtell, Lipton, Rosen & Katz. One of the big problems with debating the letter’s focus on environmental, social, and governance (ESG) issues is that it comes back to the question of whether BlackRock is powerful, or just feels the need to say it is so. In a proxy fight, BlackRock clearly does have influence as a large swing voter. As a passive (but also sometimes active, Fink would have us remember) shareholder, threats to divest are largely hollow. It has developed something of a bully pulpit, though (as in the case of halting share buybacks) it cannot upend market forces any more than I can upend gravity. Where the value of these letters really lies is in setting the tone for the market. It makes it acceptable for analysts and journalists to ask whether there are fundamental threats to companies within their own businesses, or whether those businesses are of value beyond the bottom line. It may even make directors pay attention or risk squirming in a meeting with BlackRock. All of which is not to say that Fink will lead a revolution. A serious, if slightly self-important, approach to the economy is better than an indifferent one.
Quote of the week comes from Darwin Deason, an unusual activist in that he became a shareholder of Xerox by selling the printer manufacturer his own company. Deason escalated his gripe with management this week by calling for the release of its agreement with Fujifilm, to better understand talks reportedly taking place about a deeper partnership.
“All shareholders deserve to know now what Xerox’s rights are under the central existing agreement governing the company’s future so that they can engage the company, provide their views and make their investment and voting decisions with at least the minimum cards on the table. At a time when the company appears to be bellying back up to a bar that has been unforgiving to Xerox that is doubly so.”
Article by Activist Insight
