Activist Investors: A Roar or a Bark?
By Francesco Guerrera
Can a lion be confused with a dog? In
Luohe, China, the answer is a resolute “no.” Visitors at the local zoo
weren’t impressed last week
when they found a Tibetan mastiff in the cage earmarked for the king
of the jungle.
When it comes to activist
investors, though, the situation is less clear-cut. On Wall Street, this
breed of hedge-fund manager engenders extreme reactions. Some lionize them
as intrepid champions of shareholders’ rights in the face of corporate
ineptitude. Others accuse them of terrier-like aggression, snapping at
executives’ heels with short-term demands that end up harming companies.
The debate has taken on new
urgency as high-profile activists such as
William Ackman and Daniel Loeb have
taken on the likes of
J.C. Penney Co. and Sony Corp.
Investors and corporate
executives are watching, because activists punch above their weight. They
control just over $84 billion in assets, according to HFR, a drop in the
bucket when compared with the trillions of dollars managed by passive funds.
But activists’ campaigns can often move share prices because of their
following in the market.
Mr. Icahn’s tweet last
Tuesday saying he had taken a large position in Apple, sent its shares up
nearly 5% on the day. That added some $20 billion to the company’s market
value, while, as The Wall Street Journal reported,
Mr. Icahn owns a stake of around $1.5 billion.
Are such share-price
moves—and the passions they generate among supporters and critics—justified?
- Associated Press
Activism investing is just
another way to try to beat the market by picking undervalued stocks. The
difference is that activists don’t wait for the market to recognize a
company’s value, they try to make things happen on their own terms.
Current conditions are
almost ideal for activists. With interest rates so low and stocks at record
highs, pension funds are desperate for ways to beat the market; companies
are sitting on record piles of cash earning measly returns; and since the
financial crisis, boards and executives have to be more responsive to
“Right now there is a
convergence of factors that are making conditions very ripe for all styles
of activism,” says Clifton Robbins, chief executive of Blue Harbour Group
LP, an activist fund that eschews boardroom fights.
Others argue that they
fulfill a market need. “Activism is not a cure-all for every situation,” Mr.
Ackman told me last week. “The vast majority of capital in the world is
passive. These investors control the votes. If they think an activist is
wrong, they won’t support him. But at least they have a choice.”
On this point, I found rare
common ground between Mr. Ackman and Mr. Icahn, despite their recent
squabbles over the nutritional-supplement maker Herbalife Ltd. “The big
thing we do is we make the CEO and management accountable,” Mr. Icahn said.
“[Activists] must do the job that, with exceptions, boards are not doing.”
Mr. Icahn and his peers
aren’t getting much gratitude from boardrooms for this work.
The veteran corporate
adviser Martin Lipton, for one, can’t stand activists’
“It’s not good for companies
to be subjected to short-term pressure and it’s not good for the economy as
a whole,” said Mr. Lipton, a founding partner of Wachtell, Lipton, Rosen &
Katz. “It deters investments and in the long-term it reduces the rate of
growth of GDP.”
A recent academic study appears to contradict that
assertion but Mr. Lipton’s views are widely shared in
Which is exactly the problem
in the eyes of a seasoned activist such as Ralph Whitworth. “The people who
are saying that are usually just saying: ‘Hey, give me more time to make the
same mistakes,’ ” Mr. Whitworth, a founder of Relational Investors LLC,
said. “This is what I always tell these people: We bought the stock from
your long-term shareholders. And if I am here, I am the longest-term
shareholder you’ve got.”
Chris Young, who heads a
Credit Suisse AG unit that advises companies against activists, maintains
that boards and executives should be ready before Mr. Whitworth & Co. come
knocking. “It’s the old Boy Scout’s motto: ‘Be prepared,’ ” he said. “Your
defense is performance and preparation—understanding where your weaknesses
are and how an activist might come at you”
long-term performance has been superior to their short-term one. Since 2005,
the activist hedge-fund index compiled by HFR has done much better than the
S&P 500 (including dividends). This year, however, the two are almost on
individual investors don’t get to buy into activists’ funds and are
relegated to aping their moves after they are announced. And that is where
the perils lie.
Because of the time lag of
regulatory filings, those who buy after an official announcement are almost
certain to have missed out on any big share-price movement. At that point,
the best strategy is to hold the stock and ride with the activist fund,
hoping its proposals will work out for the company.
Or, put another way, hope
that what you hear from the activist’s camp is a roar and not a bark.
Francesco Guerrera is The
Wall Street Journal’s financial editor. Write to him at:firstname.lastname@example.org
and follow him on Twitter:
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The debate has about
activist investors taken on new urgency as high-profile activists such
as Carl Icahn, William Ackman and Daniel Loeb have targeted the likes of
Apple, J.C. Penney and Sony. Photo: AP.
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