For all the talk of dry powder, activists deployed capital cautiously in the second quarter, perhaps indicating that there won’t be as much activity in the next 12 months as some had predicted. While one of this week’s big stories was a Bloomberg News exclusive that Trian Partners had deployed its winnings from Legg Mason into three new undisclosed positions (Nelson Peltz’s firm sold out after the asset manager announced a merger with Franklin Templeton but before the transaction completed), last week’s 13F disclosures paint a picture of hedge fund managers holding back from new activist positions.
What can past market crashes teach us about the current one?
97 New Activist Positions Disclosed
Primary and partial focus activists disclosed 97 new activist positions in the three months to June 30, down from 123 in the first quarter when the market was crashing and roughly comparable to the second quarter of 2019.
However, the contrast to last year comes in the amount of capital deployed in new activist positions – $3.3 billion in the quarter just gone, less than half the $6.8 billion deployed in the same period of 2019. Furthermore, only one position worth more than $200,000 was disclosed, compared with six in the second quarter of 2019.
Even before the pandemic, this year’s major proxy contest targets were repeat campaigns and several, such as GCP Applied Technologies and Mack-Cali Realty – where those that went to a vote. Activists did increase their influence at existing portfolio companies by slightly more than last year in the second quarter – the percentage point change in ownership for increased holdings averaged 1%, compared with 0.8% a year ago – further evidence of a "buy what you know" strategy.
As a counterpoint, although technology – a relatively safe bet – saw the most capital allocated to new positions, activists actually made more new investments in financial companies ranging from banks to private equity firms, and increased more positions in consumer cyclical companies than in any other sector. While not quite an anti-recessionary bet on the same level as going big on commodities, which activist conspicuously did not, there may be some signs of life yet.
Starboard Value’s three-year-long engagement with comScore has often been overshadowed by the activist’s other projects but the digital analytics company gave an update this week that reveals a lot about how Jeff Smith’s fund has been adapting its approach in recent years.
According to Reston, Virginia-based comScore, Starboard was part of one of several potential acquisition bids it received in the second quarter. Although it wouldn’t be the first takeover bid Starboard had made (see RealD in 2014), the hedge fund has greater credibility for deploying capital creatively after last year’s private investment in public equity (PIPE) deal with Papa John’s, and revealed this week that it plans to raise a special purpose acquisition company (SPAC).
Yet Starboard isn’t any closer to acquiring comScore, since the company declared that all the bids it received undervalued its common stock. A major obstacle – $150 million in convertible notes that require a payout equivalent to 120% of their face value in the event of a takeover – was issued to Starboard in 2018. ComScore says it’s willing to continue negotiating but hinted that it’s prepared to wait for the notes to expire in January 2022 if higher offers aren’t forthcoming. With the stock way down since 2017, Starboard may be better off calling its bluff.
Quote of the week comes from Legion Partners’ letter to the board of OneSpan, in which it argues the company should divest its hardware and e-signature businesses. Something we might hear quite a bit in the next six months is that companies with segments that have benefited from the impact of the coronavirus pandemic should do everything they can to let those businesses grow. Here’s Legion’s argument:
"The COVID-19 pandemic has accelerated digital transformation initiatives globally, providing an incredible tailwind for the eSignature market… However, we encourage the board to ask itself whether digital workflow features, like eSignatures, are core to OneSpan’s identity."