Next week sees the launch of our Activist Investing Annual Review 2019. I’m not about to relay all of the findings, which stretch across 50 pages, but this is a good opportunity to reflect on the process of putting it together and what it has made me think about when I think about activism.
First off, it’s only fair that we look back at some of the predictions we made in last year’s review, the first time we’d done so. We said that activists would focus on differentiating themselves from their peers and talking about environmental, social, and governance (ESG) issues – that was easy, as sure enough, board diversity made its way into the discussion and ValueAct Capital Partners’ Spring fund launched in earnest. More broadly, while interest in ESG is carrying over into 2019, very few people seem to have a playbook for identifying and dealing with ESG crises, such as those posed at PG&E and Starbucks. It remains to be seen whether activists are capable of “cleaning house” at a troubled company, or improving corporate culture, as State Street Global Advisors’ annual letter puts it.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
We also played up return proxy fights, which look like a surer bet for 2019 than in 2018 (indeed, Engaged Capital announced nominees this week at Benchmark Electronics, where it won a 2016 proxy contest), and a general lack of ideas more than we perhaps should have. While primary and partial focus activists have been less active than in the recent past, the U.S. tax reform and record M&A volumes helped propel activism to new heights. Despite relative stability, Continental Europe has been less active than expected.
Three things stood out sufficiently from 2018 to make our opening section. The first was M&A activism, of which there was plenty. From bumpitrage to full takeovers, this looks like an area activists will continue to focus on while the market is hot. Another notable feature of last year was the challenge activists set themselves, waging proxy contests at high insider-ownership companies like Campbell Soup and Taubman Centers. The third was, of course, ESG. Although a shakeup in the markets at the end of 2018 may have thrown up some new ideas, activists look likely to pull on all these levers again in 2019. Indeed, in the first contest of this year, Bandera Partners went up against 39%-insider-owned Luby’s and lost only narrowly.
Trying to divine trends for 2019 this early is difficult. Potential outcomes are a better way of thinking through what might happen; for instance, if the short-term sugar hit posed by the tax-break wears off but credit markets remain open, M&A will likely continue to dominate – especially hostile M&A. If not, more operational campaigns and more CEO removals might take priority. If U.S. markets soar again, the flight of capital to Europe and Asia could be more intense. In any case, smart activists will be testing out new markets and strategies for when conditions change.
Canadian cannabis company Aphria returned to its pre-short attack price on Thursday, after hostile bidder Green Growth Brands said it was open to changing its offer. One of the two short sellers behind the December 3 presentation that wiped half the stock’s value has already bowed out, apparently because of governance changes made by Aphria. That makes the company a rare example of one that has quickly and directly refuted a short seller. Others tend either to sail on as if nothing has happened, recovering sooner or later, while some prove way too badly governed to reform. Understanding the difference may give activist shorts pause for thought.
Quote of the week comes from Jason Ader, who spoke to Activist Insight Online about Playtech, the U.K. gaming company where he is currently weighing a proxy contest.
"Shareholders, employees, and customers reached out to me and said 'do something,'" Ader said. "I don't think there are any shareholders in the company who are happy with the stock price and are happy with the corporate governance."