‘Shareholder activism is not a privilege - it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal,’ renowned emerging markets investor Mark Mobius, 2014.
Activism remains rife in financial markets, and investors are scrutinising more elements of publicly-listed companies in order to find flaws in their businesses that they can capitalise on. Activist activity may have experienced its first dip for several years in 2017 but new activist campaigns are continuing to surface on an almost daily basis.
Shareholder activism remains rife in 2018
There has been a buzz of activism activity since the start of this month alone, some of which has pitted big players against one another.
Jeff Smith’s activist fund Starboard Value has launched an effort to overhaul the board at Newell Brands, including directors representing another activist investor, Carl Icahn, who were appointed only last month. Meanwhile, Toshiba’s biggest lenders are encouraging the company to push ahead with the 2 trillion yen sale of its memory-chip business, clashing with activist investors arguing that the unit is worth double that.
Elsewhere, Royal Dutch Shell is currently being pressured by activists to accelerate its move away from fossil fuels, while UK fintech stock Fidessa now has up to three rival bidders competing for the company, after two more emerged following its acceptance of a takeover bid from Swiss banking software group Temenos (prompted by pressure being applied by an arm of Elliot Management).
Elliot has been busy with other stocks too, having recently taken a $1 billion stake in automotive giant Hyundai Motors, with expectations for the activist to push for better corporate governance and financial returns. Smith & Nephew recently appointed a new chief executive in an attempt to fend off activist pressure over recent years, with the likes of Elliot Management having previously pushed for the company to sell off some businesses. There is similar potential at Johnson Matthey, where an activist recently emerged on its register, with the firm’s vehicle battery unit serving a growing market and the exhaust catalyst business possibly facing a split.
Although it is more a reflection of its strategy rather than activism, ‘buy, improve, sell’ specialist Melrose is finalising its purchase of engineer GKN after winning over shareholders with an £8 billion bid, following weeks or wrangling with an unhappy GKN board that also involved Melrose directors being questioned by UK politicians concerned by the deal.
Although activists targeted fewer companies in 2017 than the year before, they honed in on more large-cap companies when they did. There are many activists that have the confidence to take on the world’s biggest companies and the most active over 2013-2017 was Elliot Management, which targeted 17 publicly-listed firms worth over $10 billion each, followed by Third Point Partners at 15 and Jana Partners at 11.
Learn more about activist investors, how they work and how do you spot them?
World-renowned activist investors: a snapshot
Activist investors can be a company or an individual. There are many individuals that are renowned for their activism, but most are not dedicated activists but investors and fund managers more than happy to challenge companies when needed. However, the vast majority of activism is conducted through a vehicle like a hedge fund.
While the list of activist investors is lengthy, here are some of the most well-known. All net worth figures are according to Forbes:
Carl Icahn: The founder of Icahn Capital Management is one of the most renowned investors in the US, and has been on the scene for decades. Previous bets include the likes of Yahoo and Apple. Icahn briefly served as an economic adviser to US President Donald Trump before resigning amid concerns about a conflict of interest. His current net worth is thought to stand at about $17.4 billion.
Dan Loeb: Loeb mainly operates through Third Point Partners and is known for pushing change at companies including Yahoo, Sotheby's, and Honeywell International. Known specifically for his activism, Loeb is thought to have a net worth of around $3.2 billion at present.
Nelson Peltz: Peltz has previously made bets on companies like General Electric and Procter & Gamble and operates through Trian Fund Management. He is thought to boast a net worth of about $1.7 billion.
David Einhorn: Einhorn is renowned for questioning the books of Lehman Brothers during the financial crash, which led to the bank’s ultimate demise. However, he is also known for what are currently bad bets on internet stocks like Amazon, Tesla and Netflix. He runs Greenlight Capital and has a net worth of about $1.4 billion.
Bill Ackman: Ackman has had a colourful career and is the founder of Pershing Square Capital Management. In addition to being fined for insider trading after pushing for a merger between Valeant Pharmaceuticals and Allergan, Ackman is famously known for a huge short campaign against Herbalife, which saw him go head-to-head with Icahn. His net worth stands around $1.1 billion.
What role can activist investors play in your trading strategy?
Before researching how to utilise activist investors in your own strategy, it is worth noting there are two main types of activism. While both types are capable of wielding the capital and experience needed to encourage change, they each operate very differently and present two distinct opportunities for investors.
The first group are activist investors that look for underperforming or undervalued businesses they can invest in, with a view of influencing change in the hope of growing the company’s value and booking a profit as a result.
The other group are activists that target companies using short-selling campaigns. These investors do not look for companies to invest in, but ones they believe are grossly overvalued. Short campaigns are often used to support more extreme allegations against companies that activists believe are fraudulent or misleading in some way.
Learn more about short-selling
In a nutshell, the major difference is that activist investors look for companies with potential they can invest in and profit from, while short-seller activists seek out businesses they believe are worth considerably less than the market believes, with the aim of betting against the share price in the hope of booking a profit when the share price goes down. Sometimes, activist investors ploughing money into a business can be beneficial to share prices whereas an activist shorting a stock is rarely good news for a stock’s value.
Tracking the performance of activist investors
One way investors can use activist investors as a tool to mould their portfolios is by tracking their investments and trying to benefit from the returns these activists manage to generate. According to The Activist Investing Annual Review (released by Activist Insight in association with Schulte Roth & Zabel), the top ten activists last year were:
Elliot Management: The activist took on 21 publicly-listed companies last year with an average market cap of $11.7 billion, having targeted the likes of Arconic, Akzo Nobel and BHP Billiton. The average follower return* was 13.6%.
Trian Partners: Trian targeted just two companies in 2017, but General Electric and Procter & Gamble are both giants and it managed to add directors to both of their boards. The proxy battle between Trian and Procter & Gamble was the most expensive in history, according to AI. Trian has a seat on the board of all its investment. The average follower return was 2.3%.
Third Point Partners: Third Point challenged four companies last year, with an average size of $116.9 billion, generating an average follower return of 18.5%. It entered 2018 with positions in the likes of Nestle, Honeywell and Macerich.
Amber Capital: The activist was very active in Southern European markets last year, targeting ten companies in total, including Greece’s telecoms firm OTE and Spain’s Grupo Prisa. The average follower return was 18.7%. Amber sees Italy as a potential hub of activity moving forward.
Carl Icahn: Icahn targeted four companies in 2017, considerably fewer than the year before. They carried an average market cap of $2.5 billion and the average follower return was a solid 28.2%.
Starboard Value: The activist sought change at seven firms last year, with an average size of $3.9 billion. Starboard secured seats on the likes of comScore, Depomed and Perrigo. The average follower return was 9.5% and although the company is mostly US-focused, it has signalled the potential tax breaks for US firms generating earnings overseas could push it to move further afield.
Marcato Capital Management: Marcato targeted six businesses in 2017, averaging $2.2 billion in value. The activist enjoyed one big win against Buffalo Wild Wings but suffered a big loss against Deckers Outdoor, which produces the Ugg boot. The activist is value-focused and delivered an average follower return of 10.2%.
Jana Partners: Jana took on six companies last year with an average size of $24.1 billion, securing board seats at Bristol-Myers Squibb, Tiffany & Co and Conagra Brands. It also turned around an investment it made in Whole Foods after advocating Amazon’s purchase, after which Jana cashed in. The average follower return was 5.9%.
Oasis Management: A total of seven companies were targeted by Oasis, generally mid-cap stocks with an average value of $644 million. Average follower returns were higher than its peers at 25.4%, having challenged PanaHome, Stratus Properties and Premier Foods. It sees legs in Asia, particularly South Korea, and has said it is willing to be more aggressive in the US than the UK.
Allan Gray: Named after South Africa’s Allan Gray, the activist is seen as one only willing to take action when necessary. It played a role in the spat at Arconic and took on four firms in total with an average size of $22.9 billion. The average follower return was 18.3%.
Betting on zero: short-seller activists
Short-selling is a powerful tool used by activists to support stronger allegations against companies. Activists take short positions on stocks they believe to be fraudulent or misleading in some way in the belief their bet will eventually pay off, rather than seeking to invest and change the business.
The US is the hub of short-selling by activist investors. Of the 185 global campaigns launched last year, 137 were against US headquartered companies, compared to 25 in Asia and just 11 in Europe. The top allegations made by these investors in these campaigns continue to be related to major business fraud and the likes of misleading or fraudulent accounting.
With large-cap stocks continuing on their higher trend, short-selling campaigns moved more toward small-cap stocks last year, which is likely to continue this year. According to Active Insight, the top five activist short-sellers in 2017 were:
Aurelius Value: Having emerged two years ago, Aurelius launched five campaigns last year and generated an average return of 8%.
Viceroy Research: A big win late in the year pushed Viceroy, founded by Fraser Perring, to make an average return of 44.3% from its 2017 campaigns, having undertook five in total.
Citron Research: Citron generated a negative 20.3% return from its 13 campaigns, having lost its bets against Motorola Solutions, Nvidia and Exact Sciences.
Gotham City Research: Led by Daniel Yu, Gotham City made three bets last year which generated an average return of 8.4% by focusing on Europe and Hong Kong rather than the US.
The Street Sweeper: Street Sweeper is aggressive and often bets on a stock heading to zero, targeting firms averaging $300 million in size. Its 24 short-selling campaigns last year made an average return of 10.9%.
What is the outlook for activist investors?
With businesses taking a more proactive approach toward shareholder activism, it is likely that more companies will opt to engage with activist investors rather than take on the challenge through a proxy vote. Many companies are now taking pre-emptive action to fend off any threat of falling into the crosshairs of an activist investor. This includes choosing to up engagement with shareholders and sweeten institutional investors to win the support of its shareholder base and secure a mandate that could be used a powerful defensive tool against any activism.
If companies can win over large proportions of their shareholder base or refuse to engage with activists and choose to fight it out in a shareholder battle, then activist investors will have to refine their claims and improve the structure of their argument in order to secure the backing of other investors needed to achieve its goals.
Activists will continue their attempts to shrug off the ‘bad actor’ label that some of the market has slapped on them, by differentiating themselves from other activists and leaning on their respective track records and expertise. Areas that are likely to grow in prominence over a longer period of time are the likes of environmental and social issues, while the amount of pressure pushing for governance reform will continue to rise.
The growing focus on influencing company strategy by working with the businesses they are targeting will continue, with the hope of working with them rather than challenging them through proxy votes. This should see activists continue to target businesses when they are more vulnerable such as when management of the company is transitioning, and target companies on issues related to the board or mergers and acquisitions (M&A) activity.
Learn more about the top M&A contenders for 2018
Although the US remains the unrivalled hub of shareholder activism in the world activists have fewer undervalued targets to choose from following the lofty lifts in US stock valuations. This should see some activity shift to other regions like Asia, where they are waiting to pounce on governance changes emerging in the likes of Japan and South Korea.
However, activists that do start looking outside of the US are expected to head to Continental Europe where there are more opportunities for activists to push companies on M&A while feeling comfortable investing in European businesses with similar operations, structure and size as those international US businesses activists have become used to.
Meanwhile, activists looking to launch new short campaigns are expected to retain their focus on less liquid markets, according to Activist Insight, and continue to make larger accusations against companies in order to counter rising stock markets. This will require larger sums to be deployed and bigger bets to be made.
*Follower returns is a calculation of stock price change percentage from the first close in 2017 or, if the investment was disclosed in 2017, the close on the date an activist’s first involvement is disclosed until the sooner of the last close in 2017 or the date an activist discloses that they have exited the position.