Activist Investing – An Annual Review Of Trends In Shareholder Activism via Activist Insight
The activism surge continues
Schulte Roth & Zabel Partners Marc Weingarten and Eleazer Klein, Co-Chairs of the firm’s global Shareholder Activism Group, on what was learned in 2015 and what to expect going forward.
Any worries that the ever-growing inflow of assets to activist funds would lead to a dearth of sufficient opportunities in 2015 have proven unfounded. In 2015, activists found opportunities to deploy their capital around the globe with great success.
It’s not all about the vote
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Trian Fund Management’s campaign at DuPont in 2015 served as a stark reminder that an activist’s success is not always measured solely by the votes cast. DuPont took many of the steps Trian was urging in response to its campaign before the annual meeting. And while headlines in May declared DuPont’s CEO Ellen Kullman the victor, by October the company’s stock was down over 30%. Kullman left the company soon thereafter and, by December, Trian helped promote a game-changing deal between DuPont and Dow Chemical. The outcome of Trian’s campaign stands as a lesson that management would be wrong to assume it can ignore an activist who may lose a battle but can still win the war.
Year of the spin-off?
There is no doubt that activists served as catalysts for spin-off activity. In 2015, eBay completed the spin-off of PayPal following pressure from Carl Icahn. Additionally, The Manitowoc Company agreed to split its cranes and foodservice businesses, and Gannett completed the spin-off of its publishing business, both following Mr. Icahn’s investments in those companies’ shares. Meanwhile, Yahoo shelved plans for its Alibaba spin-off following pressure from investors, like Starboard Value, for Yahoo to sell its Internet business instead. Even DuPont and Dow Chemical’s merger plans contemplate a split into three different businesses, following calls by Trian and Third Point.
Shareholders sans frontieres
While the US remains the undisputed epicenter of shareholder activism, we’ve seen an increase in the number of activist campaigns in Europe and elsewhere around the globe. A significant number of European-based shareholders launched new campaigns in 2015, and more US-based activists have taken advantage of opportunities in Europe.
As the role and presence of proxy advisers have risen and as traditional European investors have become more open to support activists who respect cultural norms, activists have become more willing to invest in European opportunities. In 2015, French media group Vivendi agreed to increase dividends by more than $1 billion after being confronted by P. Schoenfeld Asset Management, and ValueAct Capital Partners became the top shareholder in Rolls-Royce Holdings, an iconic global company. Some US activists have even been willing to utilize their strategies elsewhere around the globe, as demonstrated by Elliott Management’s highly public attempt to block the takeover of South Korean construction company Samsung C&T.
What to expect for 2016
The “era of activism” has no end in sight. With the increased capital available to established activists, many new entrants into the sector and the increasing willingness of investors who are not dedicated activists to wage campaigns, the trend for increasing activist activity in the US, and globally, will surely continue in 2016.
With offices in New York, Washington D.C. and London, SRZ is a leading law firm serving the alternative investment management industry, and the firm is renowned for its Shareholder Activism practice. In October 2015, SRZ hosted its 6th Annual Shareholder Activism Conference in New York and in November 2015, SRZ and Activist Insight hosted a seminar in London discussing “Shareholder Activism in the UK.”
Value Investing Vs. Activism; Are They The Same Thing?
Cas Sydorowitz sees a convergence of two disciplines.
Who would you rather have on your share register, a value investor or an activist? Most CEOs would probably opt for the former, but seeing an activist invest in your company might be more of a compliment than you think. What activists and value investors have in common is a mission to find good companies which are not fully appreciated by the market at large. Both approve of sturdy revenues, “moats” that prevent rivals from overtaking and the potential for growth. In this age of mass information, it’s hard to find a stock that’s simply underappreciated. As a result, both value and activist investors will likely be searching for something that needs a little fixing.
Sometimes the flaw is management, the decisions they make or don’t make, or their knowledge and competence in specific industries. Yet it could just as easily be an overly conservative capital structure, such as a large cash holding or a low dividend payout ratio, bad governance, such as the independence of the board, or a remuneration policy that pays as much attention to long-term value creation as short-term share performance.
One of the biggest differences between an activist and a value investor is that the former will often have a far more focused portfolio, with perhaps 7-15 stocks, while many value investors will have hundreds of stocks they are looking after in their portfolios. Having a small portfolio allows the activists to spend more time and go into greater depth in the research they undertake, as well as to engage with the company regularly.
Andrey Kruglykhin, CEO of the newly formed natural resources-focused Highgate Capital, emphasizes the importance of the “ferociously detailed analysis and due diligence needed” to support “an active engagement with the company and its shareholders and other stakeholders to unlock value which is already there.” The private equitystyle analysis is done from the outside-in, to ensure that there is a path to narrowing that discount.
They do this extraordinary research because they want to come across to management and other shareholders as well-informed about the company, but also because they have to justify their fees to their own investors. Most value investors don’t have the budget to run the same forensic analysis.
Another difference is that activists are often paid based on the 2% of assets under management and 20% of profits model common to the hedge fund industry. That, combined with their concentrated portfolios, means that they are keen to see potentially value-enhancing initiatives enacted quickly. Executives should remember that it is not board seats or pyrrhic victories that matter to activists at the end of the day, but returns.
Activists, with their management consultants, headhunters and private investigators, will often be highly confident about the value that is being hidden. That also makes them determined to unlock value, and they will hire lawyers, PR firms, proxy solicitors and headhunters for a potentially public fight and to engage with the company’s shareholders to elicit their support rather than sit back and wait. So while value investors and activists look to identify similar companies mis-priced by the market, the fundamental difference is still how far they will go to narrow that discount. Understanding how the buy-side gets paid will enhance corporates’ sensitivity to their shareholders, and their ability to respond to an activist.
Cas Sydorowitz is the CEO of Georgeson Corporate Advisory, a provider of proxy, analytics and transaction support for companies around the world.
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