The words ” shareholder activism” can send gale-force willies through publicly traded companies to make a tornado look like a weakly thrown tomato.
When activists take aim — as they did last year with Yahoo — the financial winds truly turn things upside down. Corporate boards splinter, if they stay intact at all. Sometimes, the shakeup resembles more of a shakedown of my-way-or-the-highway proportions.
Meanwhile, 2017 has ushered in a new trend in investor activism — as large institutional shareholders and mutual funds get into the act. That includes Vanguard Group, BlackRock (NYSE: BLK) and State Street Corp. ( STT), says Bart Friedman, senior counsel at Cahill Gordon & Reindel, an international law firm based in New York.
Such companies are known as passive investors, which as the name implies keep buying and selling to a minimum. Many have storied histories; State Street was founded 1792, while the ink was still drying on the U.S. Constitution.
“But the largest institutional holders and fund complexes are no longer playing a passive role,” Friedman says. “They’re ready, willing and more than able to side with an insurgent, take sides on a shareholder vote and criticize the board for inaction or complacency.”
[See: 10 ETFs to Buy for Oodles of Growth.]
And that in turn invites big dogs to join the fray.
“It emboldens the smartest, most heavily resourced and savviest shareholder activists like Peter May and Nelson Peltz, as well as hedge fund lords like Dan Loeb and Bill Ackman,” Friedman says.
“No company is immune from activism — passive investing should not be confused with passive ownership,” says Rob Berick, senior vice president and managing director at Falls Communications in the Cleveland area.
That in essence means new twists in an old game, Berick says.
“What’s different is that activism is now a recognized investment class and non-traditional activists utilize activist strategies under the banner of constructionism” — or in other words, “working with management teams to effect change,” he says.
While the numbers vary depending on the source, at the beginning of 2017, activist hedge funds had about $250 billion of assets under management. That amount represents a slight dip from 2016, but still adds up to significant firepower for activists, says Chris Hewitt, a partner in Tucker Ellis’s securities group and based in Cleveland.
“Coupled with the relatively few number of public companies compared to historical figures, shareholder activism will remain part of the investing landscape for the foreseeable future,” Hewitt says. He names Carl Icahn, Trian Partners and Pershing Square among the top activist investors.
Hewitt also includes Starboard Value, a New York-based hedge fund that has a particularly aggressive reputation to match its Dickensian name — as Starboard often throws board members overboard in a high-seize adventure.
In March 2016, Starling CEO Jeffrey Smith led the charge on Yahoo — where he muscled his way onto the board and demanded the company sell itself to the highest bidder. That outcome finalized in June, when Verizon Communications ( VZ) purchased the internet company for $4.48 billion
And in an October 2014 takeover as legendary for its excess as its success, Starling made a meal out of Darden Restaurants ( DRI). Starboard’s 300-slide presentation clocked in at more than five hours, and literally pummeled Darden down to the very last breadstick: It took DRI’s Olive Garden chain to task for doling out too many of the goodies for free. Every board member was kicked out as Starboard instituted its own strategic initiatives; since then DRI stock has shot up roughly 75 percent.
[See: 8 Ways to Satisfy a Craving for Restaurant Stocks.]
Meanwhile, Yahoo’s rescuer Verizon constantly finds itself in the crosshairs of activist efforts from the Association of BellTel Retirees. Don’t let the image of docile switchboard operators turned doting grandparents enter your thoughts for a second. The BellTel posse, 134,000 strong, has been one of the most successful activist groups over the last 20 years, says BellTel president Jack Brennan.
“Verizon has been and will continue to be a target because of its executive compensation and golden parachute stances,” says Brennan, who notes that BellTel has defeated Verizon 11 times — giving a new meaning to the slogan “Can you hear me now? Good.”
BellTel’s victorious 2003 campaign “established shareholder approval for any executive severance payment exceeding three times an executive’s base salary,” he say. “It was the first time in the 100-year history of the former Bell System, all its subsidiaries and all its successors, that a proposal opposed by the board won a majority vote” — as in 59 percent.
Yet if you as an investor hope to take advantage of activist momentum, the target might be a little too quick and slippery for you to hit.
“It’s quite common for companies under activist attack to see their stock prices rise as investors foresee a takeover bid,” says Angelo DeCandia, professor of business and accounting at Touro College in New York. “The problem is that the rise often starts before the activist declares their position, which they are required to do by the SEC when they accumulate 5 percent or more.”
So even if you want to bet on a takeover, “There’s a point where the stock has been bid up to levels that are hard to justify,” DeCandia says. “Hence there may not be any excess profits.”
As for what lies ahead, DeCandia says: “Activists are targeting larger companies and doing it in ways that are both more aggressive and yet creative. The average market capitalization has increased from $2 billion 10 years ago to $8 billion two years ago.”
His conclusion? “The new normal has been laid out: Shareholder activism is here to stay.” But not, it appears, without agitating activists facing a good stiff headwind of their own — perhaps the trend that will take 2018 by storm.
[See: 7 Investment Fees You Might Not Realize You’re Paying.]
“Both sides will get better at this game,” DeCandia says. “No longer will it be a case of some savvy activist reeling in some floundering corporation. Targeted firms have learned to fight back and sharp legal talent will be attracted to both sides of the conflict.”
More from U.S. News
9 Ways to Invest in America With Bond Funds
The Top 10 Investment Portfolio for Millennials
10 Skills the Best Investors Have
Activist Shareholders Are Staying Active and Moving the Market originally appeared on usnews.com
