Recently, activist investors have performed alchemy, burnishing their base image into one with a golden tint.
It is beneficial and informative when these hedge-fund managers — notably David Einhorn of Greenlight Capital, Dan Loeb of Third Point, and Carl Icahn of Icahn Enterprises — disclose why they have bought significant stakes in a company. They articulate the advantages that would accrue from changes in a company’s leadership, business practices and capital structure.
An article in Bloomberg Businessweek, “Predators Are Good for Stocks,” argued that activist investors have become shareholders’ best friends.
“Stocks of companies targeted by activists from 2009 through 2013 gained 48 percent on average as of the end of last year, according to data compiled by Bloomberg. That beat the Standard & Poor’s 500-stock index by about 17 percentage points.”
Activists seek changes in corporate practices that would, among other things:
Remove poor management.
Reduce unseemly compensation for executives.
Spin off underperforming subsidiaries.
Encourage using cash hoards to increase dividends and/or buy back more stock.
Activist investors have changed their business practices during my career. In earlier times, they acted like schoolboy bullies, even extorting greenmail from their corporate victims. To forestall activist investors selling their stock holdings back to corporations at a premium over the market (greenmail), Martin Lipton, whose law firm advises corporations, devised the poison pill that diluted the ownership share of corporate raiders.
“The brute force of ownership is not required anymore because the big institutional players listen to both sides and are willing to back the activist fund if they believe in them,” said Gregory Taxin, co-founder of Glass Lewis & Co., the independent research and proxy advisory firm that helps institutional investors make informed decisions about corporate governance.
In the latest sign that activist investors are gaining influence and acceptance even among their detractors, Lipton said in March at an investor conference in New Orleans that some shareholder activism should be “encouraged.” He still maintains, however, that activists harm the economy because they focus exclusively on short-term profits.
Many prominent institutional investors now feel that activist investors can play a constructive role. The California State Teachers’ Retirement System first began investing strategically with these activist managers in late 2008. “We think they can go in and make improvements in companies that benefit shareholders in the long run,” said Anne Sheehan, director of corporate governance at CALSTRS, which manages $176 billion.
A New York Times article, “No Barbarians at the Gate; Instead, a Force for Change,” quoted activist investor William Ackman of Pershing Square: “It used to be that boards of decent-sized companies were impenetrable. What’s changed is that institutions are prepared to replace directors, including the chairman and chief executive, in light of underperformance.”
Several successes in 2013 improved the reputation of activist investors. Initially, Greenlight Capital’s Einhorn failed to force Apple to unload part of its $137 billion cash hoard. But Apple, after further prodding from Icahn, subsequently agreed to return part of its cash holdings to shareholders through enhanced share buybacks and bigger dividends.
In April 2013 ValueAct Capital started its ultimately successful effort to remove Microsoft’s chief executive, Steve Ballmer. His successor, Satya Nadella, has drawn such high marks for innovation that the stock has increased more than the market since his succession.
Activist investors have earned credibility by bringing expertise, passion and financial commitment to support the financial- engineering options they use to enhance shareholder value. They increase transparency, providing insight into the nitty- gritty details of a company’s operations. This scrutiny can bring clarity to weaknesses in companies and ways they can return more to investors.
Originally published in the Sarasota Herald-Tribune
