This week marks a kind of beginning for what is likely to be one of the strangest years in the history of activist investing. After a summer break punctuated by some sabre-rattling, fundraising, and tentative steps toward a return to fully functioning M&A markets, it is still hard to be certain whether we are going to see a frenetic proxy season or a damp squib.
Consider the bull case first.
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Several activists have been busy building new positions, with Elliott Management investing around $1 billion in Crown Castle International and seeking early termination of Hart-Scott-Rodino restrictions to buy a sizeable position in Noble Energy. Trian Partners has said it is building three new positions in an unusually brisk turnover of its portfolio, and Engaged Capital recently took a new position in Evolent Health. Recent activity in Europe, where activism slowed dramatically this year, also bodes well.
Elliott Management Playing An Unlikely White Knight At Aryzta
Moreover, with M&A returning, there is plenty of opportunity to play matchmaker. Virtusa and Rosetta Stone have been sold following activist pressure over the summer. Depressed or stagnant stock prices might even lead to takeover attempts – witness Senator Investment Group and Cannae Holdings blazing a trail at CoreLogic, or Elliott Management playing an unlikely white knight at Aryzta.
Activism in the energy space, missing and presumed dead during the pandemic, also appears to have picked up again. Elliott Management’s bet that Noble Energy can fetch a higher price by breaking itself up or selling assets gradually is a sign of optimism, while Calfrac Well Services in Canada is facing a takeover bid from a U.S. investor. This week, Kimmeridge Energy published a 20-page white paper with environmental proposals it plans to make as part of its foray into activism. "It is not only about doing what is right for society, it is prudent financial risk management," Ben Dell’s fund concluded.
But the opportunity set may not be all that broad.
Balance sheet activism could remain a tough sell, with companies likely to stay cautious on buybacks and dividends and most shareholders willing to back them.
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And even Bill Ackman, who appears to have ample cash available after big first half portfolio profits, wrote in his latest letter to Pershing Square Capital Management’s investors that he was holding cash in anticipation of further volatility and only expected a subset of the market to do well. "We are entering an era in which we expect the dominant, well-capitalized, great companies that comprise our portfolio to accelerate their growth in market share and profitability over the long term as they effectively adapt to the changes wrought by the virus," he said. "Said differently, we have a corporate inequality phenomenon in addition to an income inequality problem."
Earlier in August, Dan Loeb made a similar observation. "It is essential to find companies with great leadership and unique products in growing end‐markets in which they are gaining share and achieving high topline growth and strong margins," Loeb wrote. "Many of the fund’s activist positions fell into that category," he stressed.
No wonder that activists are looking to private markets, where oversubscribed special purpose acquisition companies (SPACs) are greedily eyeing a semi-burst venture capital bubble for bargains. The hunt for SPAC acquisition targets could well distract the likes of Pershing Square and Starboard Value from traditional activist campaigns in the season ahead. Although most have two years to find a merger partner, with so much competition it would be a brave manager who let this moment pass.
Investors who do not specialize in large-cap or tech stocks may have a harder time of this new reality. On another axis, whether operational or event-driven activism prospers may have a bearing on which activists return to their former strength or are forced to lie low.
Quote Of The Week
Quote of the week comes from Aryzta, the Swiss bakery company in the midst of a proxy contests with Veraison Capital and Cobas Asset Management and with Elliott Management eyeing an opportunistic bid. After the dissidents won support from Glass Lewis, the company issued a four-page letter to shareholders, warning:
“The report contains emotive language, similar to that used by the shareholder group, which becomes integral to the recommendations.”