Karl Marx was definitely, definitely not a capitalist. Nor was he a stock market maven. But it’s no stretch to adapt his slogan spurring worker revolution for investor activism: “Investors of the world, unite! You have nothing to lose but your chairman of the board. You have a world of wealth to win.”
It’s truly all about winning when you get down to it, with shareholder revolts hitting all-time highs. Citing Thompson Reuters figures, the global financial portal Investing.com reports that activist investors launched a record 508 campaigns against U.S. companies last year.
Expect more uprisings in 2016.
“The trend is on track to grow this year, as more and more hedge funds and individual investors take up activist roles in companies such as Apple (ticker: AAPL), Tribune Publishing Co. (TPUB), DuPont Co. (DD) and Mondelez International (MDLZ),” says Jesse Cohen, Investing.com’s senior editor.
What do such offensives entail? Like political or social activism, investor activism often kicks off at a grassroots level, though the instigators in this case aren’t of the mom and pop variety. Right from the start, they have muscle to wield and experience at dominating the game.
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In the typical scenario, powerful shareholders — whether wealthy individuals or juggernaut firms — get the ball rolling as frustration mounts with the leadership of company boards.
“In many ways, activism has the feel of a grassroots initiative because the activist must convince other shareholders to agree with them that the company needs substantial changes,” says Bruce Goldfarb, founder, president and CEO of Okapi Partners, based in New York City.
And if Marx had a heart for the proletariat, investor activists have one for profit — and overthrows of a different kind.
“If a company disagrees with the activist’s suggested strategy for creating value, the activist can run a proxy contest to unseat members of the company’s board of directors,” Goldfarb says.
Having an impact. Win or lose, “Many company boards have become more open to listening to their shareholders than ever,” he says. “Activism has clearly opened the door for shareholders to have a voice in the boardroom.”
Much depends on whether the voice is conversational or confrontational.
The latter was the case late last year, when Yahoo (YHOO) found itself the target of a campaign that included Canyon Capital Advisors, the hedge fund SpringOwl Asset Management and Starboard Value. Collectively or individually, they called for the ouster of unpopular CEO Marissa Mayer, slashing the work force by 75 percent and finding a buyer for the troubled company.
The efforts, if they didn’t succeed outright, certainly knocked the exclamation point off Yahoo’s moniker and replaced it with a question mark. The company put itself up for sale in February, and narrowly avoided Starboard’s efforts to gain traction on a board takeover in March.
A restaurant tale. One person intimately involved in the unfolding drama was Andrew Freedman, a partner and co-chairman of Olshan Frome Wolosky’s shareholder activist practice. While Freedman declined to comment on his representation of Starboard in the Yahoo matter, he offered his take on another “historic” effort that replaced all the board members at another company.
“There’s perhaps no better example of an activist success story than Starboard Value’s proxy contest at Darden Restaurants (DRI),” Freedman says. The casual dining chain runs Olive Garden, Longhorn Steakhouse and The Capital Grille — and Starboard fought hard to take control.
Less than six months after Darden sold its Red Lobster chain for $2.1 billion — a move Starboard CEO Jeffrey Smith blasted as “truly unbelievable” — Starboard prepared almost 300 slides worth of recommendations and criticisms. These ran the gamut from attacking the Red Lobster sale to questioning the number of free breadsticks Olive Garden restaurants doled out.
The Starboard-led takeover of DRI triumphed on Oct. 10, 2014, and since then “the new board has overseen a dramatic operational turnaround, implementing many of Starboard’s strategic initiatives,” Freedman says. And to date, DRI stock is up 40 percent, trading at $67.50 per share.
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Debating the impact. But are all activists in it for the long haul, or the greater good of all?
“In recent years, investor activism has acquired a negative reputation,” says Parveen Gupta, professor and chairman of accounting at Lehigh University in Bethlehem, Pennsylvania. “Usually large shareholders with an interest of 10 percent or so initiate such changes — and when they succeed in getting the stock price of a company up, they quickly exit.”
It’s always possible that a changing of the guard at the board level can bolster the long-term prospects of a business, even if the activist party sells its stake. But if the goals involve immediate profit taking, are such campaigns in the best interests of other shareholders dedicated to a buy-and-hold strategy?
It depends largely on how the remaining investors step up once an activist effort succeeds. “Shareholder involvement is a key pillar of good corporate governance,” Gupta says.
What’s more, an activist stake often runs far from a majority position — and may even begin before the revolt leader owns a single share.
“Many activist investor campaigns begin when an investor identifies what they believe is an undervalued company,” says Mark Rogers, founder and CEO of BoardProspects.com, a board recruitment network. “They then take an equity position — sometimes as low as 1.5 percent — and begin a campaign to encourage the company’s board of directors to take certain actions to increase overall value.”
If those actions don’t transpire and share prices decline, momentum can then build for the financial witch hunt. And it doesn’t hurt if you’ve got an activist rock star that grabs headlines, such as the multi-billionaire Carl Icahn.
Team a big kahuna like Icahn with a big company such as eBay (EBAY) and you’ve got all the makings of a headline-grabbing machine. Icahn pushed for the online auction site to spin off PayPal, its digital payments processing arm. At first eBay resisted — and Icahn retreated in April 2014. But just two months later, eBay changed its stance.
PayPal Holdings (PYPL) became an independent company in July 2015 and Icahn turned his 46.3 million eBay shares into the same number of PayPal shares. (It’s worked out well for him so far, with PayPal up close to 7 percent since the spinoff.)
[Read: Stock Market Showdown: McDonald’s vs. Burger King.]
In the aftermath, Icahn was seen neither as a profit taker nor a troublemaker — a sure sign that activism itself has undergone a radical makeover over the last decade.
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Investor Activists Get Their Share originally appeared on usnews.com
