Activist investors

Let’s do it my way

Big companies are being stalked by hedge funds with new ideas

May 25th 2013 |The Economist - From the print edition

EVEN those in charge of listed corporations have bosses, however much they dislike thinking of their shareholders that way. So most chief executives hope to avoid the attention of “activist” investors—mostly hedge funds that specialise in shaking up listed companies in the hope of a share-price jolt. Sadly for those who dwell in corner offices, activists are getting brasher. Not only do they have growing cash piles to deploy, they are now comfortable taking on even the biggest companies.

Today’s activists are the descendants of the corporate raiders and asset-strippers who helped enliven the 1980s. Like their forebears, they target companies with sleepy managers, too much idle cash or ill-fitting divisions that might be lucratively spun off. The stakes they take in their targets tend to be small: typically 5% and in larger companies often much less. But funds often enlist the support of other shareholders to badger management for reforms. If that fails, a messy fight can ensue. Nasty words are traded in leaked letters or, better still, on cable television.

Sony is the latest famous name on the hit list. On May 14th Daniel Loeb, the boss of Third Point Management, disclosed that he owned 6.5% of the Japanese conglomerate, a stake worth $1.1 billion, and suggested it break itself up. This would lift the share price by 60%, he hopes, though the company is sceptical. Last month Apple, a computer-maker that is the world’s most valuable listed company, was prodded into promising $100 billion in payouts to shareholders in the next three years. This appeased David Einhorn, who heads Greenlight Capital, even though it fell short of his even bolder original suggestion. Other companies being hounded to varying degrees include UBS, PepsiCo, Netflix, Dell and Microsoft.

Some activists approach their targets with bright ideas based on extensive research. More often, and more prosaically, they pester firms for a quick return of cash to shareholders. Breaking up unwieldy corporations is coming back into fashion. Low interest rates and perky stockmarkets mean that assets being divested can fetch top dollar. Ousting a boss seen as a drag on the company also sometimes works, but not always: Yahoo, an internet company, has recovered somewhat since its chief executive was replaced last year in a campaign orchestrated by Mr Loeb, whereas J.C. Penney, a retailer, is languishing even though an activist brought in a new boss (who has since been sacked). Energy companies with easy-to-flog divisions have been popular targets lately, as have cash-rich tech groups and ailing financial firms.

Activists have long preyed on smaller firms. Their appetite for bigger game reflects investors’ interest. Hedgies now have $73 billion to deploy, according to Hedge Fund Research, a data provider, up from $12 billion in 2003 (see chart). That may well be an underestimate, as more funds, in search of the latest fad, try their hand at browbeating listed firms.

Activists’ ideas are increasingly winning the backing of shareholders with deeper pockets. In the past traditional investors, such as pension funds or long-term asset managers, treated activists as little more than gadflies and hesitated to work with them. No longer, claims Carl Icahn, a pioneer of the type: “Traditional investors take us more seriously now. Some even egg us on.” Indeed, some American pension funds have even placed money with activists to keep companies on their toes. A side-effect of bringing big investors on board is that arguments are often less noisy. Institutions are still loth to be dragged into messy fights played out in the pages of the Wall Street Journal. Most activism now takes place privately, says Barry Rosenstein of Jana Partners, a hedge fund. “Often there isn’t a fight. We may be accelerating what the company may have considered,” he says diplomatically. In Europe this is not news: public quarrels have tended to be rarer.

Critics warn that activists exacerbate short-termist tendencies in firms already obsessed with quarterly results. Jack Welch, GE’s former chief executive, probably spoke for many bosses when he said recently that if he were in charge of Apple he would “give Einhorn the back of my hand”. They regularly lobby for measures that protect them from their tormentors.

Activism has been among the more profitable hedge-fund strategies in recent years, though that may have more to do with rising share prices than with investment wisdom. Yet a dip in the markets could mean more business for activists as shareholders and bosses become more receptive to their ideas.“It is often easier to get firms to change when they are in crisis,” says Eric Knight of Knight Vinke, a European fund. That would please the audience, especially if the fights are public and gory. Chairmen and chief executives, however, will no doubt resent being reminded that they too must answer to someone

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