THE WALL STREET
MARKETS | Updated
March 18, 2013, 11:23 p.m. ET
Draw More Attention
ANUPREETA DAS and
Activist investors have
been called raiders, distractions and dissidents. Now, they are
getting a new label: "asset class."
In recent years, this
once-fringe investing approach has matured, with activists honing
their techniques and seeking bigger corporate prey. In the process, an
industry is growing up around them, with big investors pouring money
into activist funds, researchers tracking the investors' moves and
bankers jockeying for work defending companies against activists.
Apple Inc. sought advice from
Goldman Sachs Group Inc. when it came under fire this year from
activist hedge-fund manager
David Einhorn, who has been pushing the company to return more
cash to shareholders, according to people familiar with the matter.
Apple declined to comment but Chief Executive
Tim Cook has said several times recently that the company is
looking at ways to return cash to shareholders.
Activist investors snap up
stakes in companies and press for changes such as a sale or stock
buyback, often throwing public barbs in the process. Lately, activist
William Ackman has been waging a campaign against
Herbalife Ltd., calling it a pyramid scheme, which the company
denies. Meanwhile, Paul Singer's Elliott Management has pressed for
change at oil producer
Hess Corp., calling for the company to shed assets and split in
two. Hess recently said it would seek to sell some businesses, but not
because of Elliott's demands.
The old-style "corporate
raiders"—investors such as Carl Icahn, Kirk Kerkorian and the late
Saul Steinberg—were often reviled on Wall Street as self-interested
agitators out to make a quick buck during the category's first heyday
in the 1980s. By scooping up stock of undervalued companies, these
investors used their power to unseat boards and forced firms to sell
off assets or even go into bankruptcy—often giving an immediate boost
to share prices.
After some big failures—and
corporations developing countermeasures like so-called poison
pills—activists accepted a lower profile, only to blossom again lately
in a modified form.
The new style of activism,
with more emphasis on research, collaboration and a push for changes
that investors argue make sense long term, is attracting a broader
base of followers.
A rush of money came into
these funds before falling off amid the financial crisis, and flows in
the past two years are robust again. The $65.5 billion that U.S.
activist funds had under management at the end of last year is the
highest in a decade; in 2003, activist funds had $11.8 billion,
according to data from HFR Inc., which tracks the hedge-fund industry.
On average, HFR's activist
index has performed more than three percentage points higher than its
weighted composite index for all hedge funds for the past four years.
"As long as activism can
generate return above stocks in general and is seen as being
analytically based and thoughtful, institutions are going to
increasingly invest in activism as an asset class," said Gregg
Feinstein, co-head of the mergers group at Houlihan Lokey, an
investment bank that has recently ramped up its activist advisory
Many activist investors
produce extensive research papers that aim to illustrate how a company
could boost returns. Sometimes they poll a company's shareholder base
to assess how much support they would have before making a move.
"On balance, activism has
been good for corporations," Robert Kindler, mergers chief at
Morgan Stanley, said at a conference last year.
Activists are also stalking
bigger companies: Of the 241 activist campaigns aimed at boosting a
company's financial returns or securing board seats last year, 21%
targeted companies with market values of over $1 billion, according to
FactSet SharkWatch. That is up from 7% in 2009.
Earlier this year, the
California State Teachers Retirement System pension fund, the
country's second-largest public pension fund, publicly supported
activist Relational Investors LLC in urging
Timken Co., a $5.6 billion industrial conglomerate, to separate
its steel and bearings businesses.
"If you team up with a
company like Relational, they can…get a little more influence," said
Anne Sheehan, director of corporate governance for the pension fund.
Calstrs also invests with activist
Nelson Peltz's Trian Fund Management LP, according to the pension
Timken has said it
"carefully evaluated" input and continues to believe the company is
better as a whole.
Not every activist campaign
ends up a success. Mr. Ackman, for example, has seen the value of his
J.C. Penney Co. decline after he invested with much fanfare in
2010. And Mr. Kindler said in his remarks last year that companies
remain wary of activists, noting that "it's frustrating when activists
just get it wrong."
As a result, bankers said,
more companies are studying whether there are ways to improve their
businesses before activists knock on their door. That has created a
new opportunity for Wall Street banks. Winning a role on a company's
defense effort against an activist can often lead to additional
business, such as an advisory role if the company decides to spin off
or sell an asset.
Goldman, which built the
reputation of its advisory business partly by defending clients
against hostile takeovers, was among the first banks to focus on
advising companies on activist situations. Other banks, including
J.P. Morgan Chase & Co. and
Barclays PLC, have taken similar steps. The Barclays team focuses
on larger corporate clients who expect their advisers to provide
"advice and knowledge on who's across the table from them," said
Daniel Kerstein, head of the bank's strategic finance group.
Chris Young, who was hired
Credit Suisse Group AG in 2010 to lead the bank's takeover-defense
unit, says bankers in this role get access to senior executives
because of the "existential" threat presented by activists. Credit
Suisse several years ago set up a dedicated team to help banks with
activists. "It's a great way to have a dialogue as a bank at that
level," he said. "Competition is fierce."
contributed to this article.
Anupreeta Das at
firstname.lastname@example.org and Sharon Terlep at
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