When the names of Carl Icahn, Daniel Loeb, T. Boone Pickens, Guy Wyser-Pratte or Bill Ackman appear on the corporate share register, alarm bells should ring in the boardroom. These shareholder activists believe they can increase the price of the shares by restructuring the company. They will take no prisoners in the process.
Kit Bingham, Head of the Chair and Non-Executive Director Practice at Odgers Berndtson, says: “They deliberately take positions in companies that are undervalued. They seek to unlock the value through a governance-led activist campaign. This may be around a change of chairmanship, creating sufficient noise to gain press attention. They use their rights as shareholders to agitate for change, the share price goes up and they move on to the next one. These are dedicated activist vehicles with a hedge fund-type approach.”
The noise made by activist funds greatly outdoes its size. Their combined assets under management are estimated at between $75 billion and $100 billion compared with the $2.5 trillion hedge fund industry overall. However, their supporters say their assets have grown faster than hedge funds. Activist funds are running some 340 campaigns a year, a number that has doubled each year over the last three years. According to a recent Economist article, one company in two in the S&P 500 index of America’s most valuable listed firms has had a big activist fund on its share register, and one in seven has been on the receiving end of an activist attack over the last five years.
As Apple, Microsoft, Herbalife, PetSmart, Procter and Gamble and Ebay have discovered, activists need only take a small stake in a company, before they start pressing for board discussions or a board seat. Then they are likely to make their demands. This may be a return of cash to shareholders, a corporate restructuring or the sale of non-core parts of the business. The strategies that activists promote are often seen by the boards as sensible. The means they use to promote them may be less comfortable.
Daniel Loeb, the CEO of Third Point, an investment advisor based in New York City, is a notable activist investor. He wrote to one CEO the following: “Since your various acquisition and operating blunders have cost unit holders approximately $570 million in value destruction, I cannot understand your craven stance with respect to shareholder communications.”
The constructive activist
Other activists work much more discreetly. GO Investment Partners, an independent partnership managing constructive activist investment funds in Europe and Japan, seeks to make changes by working with managers, rather than against them. GO CEO, Steve Brown, says: “We are constructive activists. We prefer to take a stake in a company and we seek to have private dialogue with board members about what we perceive as strategic governance issues, with a view to being a catalyst to corporate change.” Brown cites the case of GO’s decision to invest in Lagardere, the French owners of Hachette, the publishers.
A consensual approach
Lagardere, which had already been the target of a long-running campaign mounted by Guy Wyser-Pratte, a noted aggressive activist investor, was about to sell stakes in EADS and Canal+ and reap a windfall. The stock had failed to price in the proceeds of the sales, so timing of GO’s involvement was critical. “The market feared that management would blow the money and the stock was nothing like its underlying value. We had a deep dialogue with the key people in the company, and essentially persuaded them to make very public statements about what they would do with the money.” Brown persuaded the managers to pay out the proceeds of the two sales to shareholders in the form of shareholder dividends. GO, an investor with $900m under management that invests in mid-size companies, held the stock for three and a half years and obtained a very satisfactory 25 per cent annual internal rate of return. The consensual approach is particularly important in Japan, says Brown. GO has a fund in Japan, with 12 investments. “Activist investors will get absolutely nowhere in Japan if they behave aggressively. The board will just put up the shutters. We always have extensive discussions with management before we take a stake. We often end up filtering out many companies as they do not understand our intentions.” Guy Wyser-Pratte finds many French companies resistant to the activist message. “The management rarely own many shares in their business and they don’t understand the share- owning culture.”
Wyser-Pratte, a former American Marine, typifies the more aggressive stance. He has brought the tactics of the battlefield to the boardroom. “When you are an investor and you find a rat’s nest, you have to become operational. That is the only way you can save your chestnuts from the fire.” Wyser-Pratte aims to gain a board seat in companies where he invests and have a keen operational role in its management.
The Kuka experience
He gave the example of his campaign against the management of Kuka, a German robotics company. “We started investing in the company in 2003. We threw out the first President in 2005 after a shareholders’ meeting. Then we replaced the Chairman because he wasn’t moving fast enough to restructure the robotics division. Then we brought in a new shareholder and made common cause to increase the pressure on management. We reorganised the company completely.” Wyser-Pratte says he sold out of the company’s stock after its stock had risen from €11 to €77 in five years. He boasts: “Activist campaigns are not a short-term thing. But this has been called the greatest example of shareholder activism ever in Germany.”
While the colourful activists tend to grab and use the headlines for their noisy campaigns, conservative institutions are quietly riding on their coattails to push management along in a similar direction. Kit Bingham adds: “Funds that track the index don’t have the option of ‘voting with their feet’ and selling the shares in an underperforming company. So instead they tell the managers of poorly performing stocks in their portfolio that they need to raise their game. They will not say, this is how you should run your company. But they will ask for a strategic review. These funds do not mount high-profile press campaigns or proxy battles. They push management rather than threaten to oust it. But their goal is the same, to be a catalyst for some strategic action to increase a poorly performing share price.”
As more investors adopt the activist approach, the pressure on managers to drive their share prices higher and faster grows ever more intense. The alternative may be a knock at the boardroom door from one of the storied activists and a very harsh and public showdown.
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