March 21, 2013
Activist Fights Draw More Attention
This recent WSJ article bears reading:
Activist investors have been called raiders, distractions and dissidents. Now, they are getting a new label: “asset class.” In recent years, this once-fringe investing approach has matured, with activists honing their techniques and seeking bigger corporate prey. In the process, an industry is growing up around them, with big investors pouring money into activist funds, researchers tracking the investors’ moves and bankers jockeying for work defending companies against activists. Even giant Apple Inc. sought advice from Goldman Sachs Group Inc. when it came under fire this year from activist hedge-fund manager David Einhorn, who has been pushing the company to return more cash to shareholders, according to people familiar with the matter. Apple declined to comment but Chief Executive Tim Cook has said several times recently that the company is looking at ways to return cash to shareholders.
Activist investors snap up stakes in companies and press for changes such as a sale or stock buyback, often throwing public barbs in the process. Lately, activist William Ackman has been waging a campaign against nutritional-supplements company Herbalife Ltd., calling it a pyramid scheme, which the company denies. Meanwhile, Paul Singer’s Elliott Management has pressed for change at oil producer Hess Corp., calling for the company to shed assets and split in two. Hess recently said it would seek to sell some businesses, but not because of Elliott’s demands.
The old-style “corporate raiders”–investors such as Carl Icahn, Kirk Kerkorian and the late Saul Steinberg–were often reviled on Wall Street as self-interested agitators out to make a quick buck during the category’s first heyday in the 1980s. By scooping up stock of undervalued companies, these investors used their power to unseat boards and forced firms to sell off assets or even go into bankruptcy–often giving an immediate boost to share prices.
After some big failures–and corporations developing countermeasures like so-called poison pills–activists accepted a lower profile, only to blossom again lately in a modified form. The new style of activism, with more emphasis on research, collaboration and a push for changes that investors argue make sense long term, is attracting a broader base of followers.
A rush of money came into these funds before falling off amid the financial crisis, and flows in the past two years are robust again. The $65.5 billion that U.S. activist funds had under management at the end of last year is the highest in a decade; in 2003, activist funds had $11.8 billion, according to data from HFR Inc., which tracks the hedge-fund industry. On average, HFR’s activist index has performed more than three percentage points higher than its weighted composite index for all hedge funds for the past four years. “As long as activism can generate return above stocks in general and is seen as being analytically based and thoughtful, institutions are going to increasingly invest in activism as an asset class,” said Gregg Feinstein, co-head of the mergers group at Houlihan Lokey, an investment bank that has recently ramped up its activist advisory practice.
Many activist investors produce extensive research papers that aim to illustrate how a company could boost returns. Sometimes they poll a company’s shareholder base to assess how much support they would have before making a move. “On balance, activism has been good for corporations,” Robert Kindler, mergers chief at Morgan Stanley, said at a conference last year.
Activists are also stalking bigger companies: Of the 241 activist campaigns aimed at boosting a company’s financial returns or securing board seats last year, 21% targeted companies with market values of over $1 billion, according to FactSet SharkWatch. That is up from 7% in 2009.
Earlier this year, the California State Teachers Retirement System pension fund, the country’s second-largest public pension fund, publicly supported activist Relational Investors LLC in urging Timken Co., a $5.6 billion industrial conglomerate, to separate its steel and bearings businesses. “If you team up with a company like Relational, they can…get a little more influence,” said Anne Sheehan, director of corporate governance for the pension fund. Calstrs also invests with activist Nelson Peltz’s Trian Fund Management LP, according to the pension fund. Timken has said it “carefully evaluated” input and continues to believe the company is better as a whole.
Not every activist campaign ends up a success. Mr. Ackman, for example, has seen the value of his stake in J.C. Penney Co. decline after he invested with much fanfare in 2010. And Mr. Kindler said in his remarks last year that companies remain wary of activists, noting that “it’s frustrating when activists just get it wrong.” As a result, bankers said, more companies are studying whether there are ways to improve their businesses before activists knock on their door. That has created a new opportunity for Wall Street banks. Winning a role on a company’s defense effort against an activist can often lead to additional business, such as an advisory role if the company decides to spin off or sell an asset.
Goldman, which built the reputation of its advisory business partly by defending clients against hostile takeovers, was among the first banks to focus on advising companies on activist situations. Other banks, including J.P. Morgan Chase & Co. and Barclays PLC, have taken similar steps. The Barclays team focuses on larger corporate clients who expect their advisers to provide “advice and knowledge on who’s across the table from them,” said Daniel Kerstein, head of the bank’s strategic finance group.
Chris Young, who was hired by Credit Suisse Group AG in 2010 to lead the bank’s takeover-defense unit, says bankers in this role get access to senior executives because of the “existential” threat presented by activists. Credit Suisse several years ago set up a dedicated team to help banks with activists. “It’s a great way to have a dialogue as a bank at that level,” he said. “Competition is fierce.”