Activist funds, which buy stakes in companies in order to force changes in
their operations, are one of the hottest trends in finance. Over the past
year, the money flowing into them has surged so much that their assets
under management are up more than 50 percent, while those of hedge funds
as a whole have risen less than 15 percent.
What is driving the growth of activism? The most immediate reason is that
the funds are performing well, as
a report from Citigroup Inc.’s Financial Strategy and Solutions Group,
of which I am chairman, shows. Since the beginning of 2009, activist hedge
funds, on average, have earned an annual return after fees of almost 20
percent, compared with 13 percent for the stock market as a whole and 8
percent for all hedge funds. (That’s right: After fees are taken into
account, hedge funds have underperformed the market.) The managers of the
most successful funds are becoming legends by combining outsize returns
with colorful personalities.
Peter R Orszag»
Peter R. Orszag is a Bloomberg View columnist appearing on Wednesdays.
Vice chairman of corporate and investment banking and chairman of the
financial strategy and solutions group at Citigroup, he was President
Obama's director of the Office of Management and Budget.
Orszag was previously the director of the Congressional Budget Office,
from 2007 to 2008. He served in two different jobs in the Clinton
administration, as a senior economist at the Council of Economic
Advisors from 1995 to 1996 and, in 1997, as top adviser to the
director of the National Economic Council. He has a Ph.D. from the
London School of Economics and a B.A. in economics from Princeton
University. An adjunct senior fellow at the Council on Foreign
Relations, he lives in Manhattan.
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These funds are also growing in
number, and they’re aiming for larger and larger companies. This year, for
Carl Icahn bought a large share of Apple Inc. stock, ValueAct Holdings
LP has targeted Microsoft Corp., and Trian Fund Management LP has pursued
DuPont Co. Although most activist campaigns still occur in the U.S.,
foreign activity is rising rapidly, too.
Even strong stock market performance is no longer protection against an
activist effort. This year, more than half of targets had outperformed
their peers before the activist campaigns began. Activists clearly believe
that, with changes, successful companies can perform even better in the
Activists are increasingly turning their attention to conglomerates with
multiple lines of business and low investment. And many companies are
targeted multiple times; 60 percent of the companies activists went after
this year had been the subject of previous campaigns.
What impact do the activist funds have on the companies they invest in? It
would be impossible for activists to earn such high returns if their
campaigns did not increase the value of the shares they buy. And that is
indeed what happens: On average, from a month prior to the campaign
through two years after it starts, targeted companies receive returns
about 20 percent to 30 percent higher than those of their untargeted
This average, however, masks substantial variation in the targeted
companies, research by the Financial Strategy and Solutions Group shows.
Indeed, more than half of them experience returns that lag the market.
Activists often invest in several companies simultaneously, and big
returns from one more than offset weak returns from the others and bring
the average well above the market.
All of this makes you wonder: What lasting differences do activist hedge
funds make in the way targeted companies operate and in the lives of the
people working there?
Alon Brav of Duke University, Wei Jiang of Columbia University and
Hyunseob Kim of Cornell University
have explored these questions for manufacturing companies in the U.S.
On average, the researchers find, activism causes a temporary decline in
productivity, presumably as the company reorganizes, but within three
years, productivity rises significantly.
That scenario is consistent with the financial returns, and research shows
an important mechanism for the improvement: Activists often push for the
sale of less productive plants and, under new owners, those plants become
noticeably more productive.
What about the effect on workers? Brav and his co-authors find it is
decidedly negative. While the workers’ productivity rises -- on average, 7
percent -- their hourly wages remain the same.
Furthermore, the number of workers and the hours per worker both fall, for
a total decline of more than 10 percent in labor hours. Brav and his
co-authors conjecture that the workers may have previously enjoyed wages
above their market value, and that the activist intervention removes this
wage premium. Note also that they examined only averages; given the
variation in financial returns, one might expect the effects on business
performance and workers to also vary significantly.
activists become ever more prominent, and the easier targets are
exhausted, their average excess financial returns may diminish. And even
(or especially) where activism helps to produce better value, workers do
not seem to share in the benefits.
Orszag is vice chairman of corporate and investment banking and
chairman of the financial strategy and solutions group at Citigroup Inc.
and a former director of the Office of Management and Budget in the Obama
contact the writer of this article: Peter Orszag at email@example.com.
contact the editor responsible for this article: Mary Duenwald at
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