THE WALL STREET JOURNAL.
2013, 1:20 AM ET
By Maxwell Murphy and Emily Chasan
CFO Report Editor, WSJ Pro
companies sitting on piles of cash or shelling it out to their executives
better beware: activist investors are targeting you.
year, 60% of activists’ campaigns have focused on getting companies to boost
returns or shake up their board. A record 30% of the campaigns have been
aimed at big companies, almost double the average over the like period for
the past four years, according to FactSet SharkWatch. The data provider
defines large companies as those whose market value exceeds $1 billion.
there’s a lot of cash on your balance sheet, the argument is you’re not
getting an adequate return on cash, and you need to do buybacks or
dividends,” said Alex Khutorsky, managing director at Valence Group, a New
York investment bank. Mr. Khutorsky said he is getting lots of calls from
companies for advice on defensive strategies.
Forty-one activist campaigns this year have demanded that companies return
cash to shareholders via dividends or buybacks, up more than 50% from a year
earlier, according to SharkWatch. Skittishness about the economy and the
lack of political harmony in Washington have prompted companies to sit on
near-record cash troves, totaling more than $1.8 trillion, according to
Federal Reserve data.
Investors say that conditions for activism are the ripest in years. Fund
managers have amassed their own cash reserves, fueled by rising stock
prices, and can borrow at low interest rates if they want to build
influential stakes in companies. They also are taking off the kid gloves.
Proxy fights are at a five-year peak, with most of them focused on booting
“People are starting to realize that no one is safe,” Mr. Khutorsky said,
adding, “Companies are thinking through their vulnerabilities.”
companies have quelled activist-led rebellions by distributing cash through
dividends and share repurchases. Of the companies in the S&P 500 index, 83%
are offering cash dividends, the most since the late 1990s, according to
FactSet. Altogether they doled out $329 billion during the year ended in
July, double the amount 10 years earlier. Buybacks, meanwhile, spiked to
$122.8 billion between May and July, the highest level for a fiscal quarter
in nearly two years.
Companies aren’t thrilled to have an activist knock on their door, because
proxy battles can be costly. Earlier this year, OshKosh Corp. said
Icahn‘s failed effort to shake up its board and acquire control of the
specialty-vehicle maker cost the company more than $16.3 million, or 11
cents a share.
Time, too, is money. Activists “can just suck the living daylights out of
management,” said Michael Smiley, chief financial officer of Zebra
Technologies Corp. and a director of Twin Disc Inc., a power-transmission
equipment maker. In 2007, one of the most-active years for shareholder
revolts against small companies, Twin Disc was targeted by activists who
wanted it to put itself up for sale, but the activists failed to win wide
Managers can easily become consumed by their discussions with activists, Mr.
Smiley said, spending days preparing with lawyers and advisers, while also
having to update the board and oversee daily operations.
course, shareholders’ suggestions can be valuable. “Sometimes they have good
ideas that help address some of the sacred cows companies have,” he added.
Between 1994 and 2007, companies targeted by activist hedge funds
experienced, on average, an initial 6% rise in their stock price and
improved their performance against peers by about two-thirds, according to a
study by Lucian Bebchuk, director of the corporate-governance program at
Harvard Law School.
“People would be amazed at how poorly some companies are run,” Mr. Icahn
says of public companies generally, adding that “in many ways corporate
governance is worse than it was 20 years ago.”
the past two years, Apple Inc. has assuaged some activists with its dividend
and buyback programs. But in August, Mr. Icahn disclosed a “large position”
in the still cash-rich gadget maker. More recently he tweeted that he was to
meet with Apple CEO Tim Cook to discuss the “magnitude of its
week, CtW Investment Group sent a letter to the chairman of
Oracle Corp.'s compensation committee, threatening to vote against
Oracle’s pay practices, and possibly against directors who sit on the
committee, if Oracle doesn’t make changes that include limiting
stock-option-based awards to executives.
Oracle has said changes in its pay practices aren’t warranted.
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