December 23, 2013 1:11 pm
Activist hedge fund managers get board
By Stephen Foley in New
Activist hedge fund managers are sitting on a record amount of money to
deploy against underperforming companies. They are targeting larger
businesses than ever before, and they have never had so much success in
securing what they want.
But if this year marks
the triumph of activism,
what do the activists do next?
The very presence of this particular breed of hedge fund managers on a share
register used to prompt a company to put up the barricades. Now they are
finding more directors receptive to the traditional activist ideas of
returning capital, spinning off businesses and are even inviting activists’
representatives on to the board.
Jana Partners, the $8bn fund run by Barry Rosenstein, launched five activist
campaigns against US companies this year, all of which have resulted in
change without so far resorting to a proxy fight for board seats.
agreed to Jana’s
suggestion that it jettison underperforming stores, for example,
an oil and gas explorer, acceded to demands to split itself in two.
“Good ideas usually win out over the long run,” Mr Rosenstein says. “What is
changing is that more and more boards are seeing the inevitable outcome and
skipping the perfunctory battle, and we benefited from that.”
Institutional Shareholder Services calculates that 68 per cent of proxy
fights for board representatives resulted in success for activists this
year, and that does not include cases where the agitators were invited on to
the board before launching a fight. The number was 43 per cent last year.
Activists have an easier path to victory, now. Years of corporate governance
campaigners chipping away have paid off and American companies maintain
fewer of the staggered board elections that blocked change and fewer of the
poison pill defences that blocked activist stakebuilding. Activists also
have the ear of the traditional large fund management groups, which are
themselves pressing management to be more responsive to shareholder
For their part, and with notable exceptions, activists have been toning down
the invective against existing managers and working harder to present
credible plans and to propose serious board candidates.
“Activism in general has become more serious,” says David Rosewater, partner
at Schulte Roth & Zabel, who has advised several activist hedge funds. “Many
activist situations never see the light of day or settle shortly after it
becomes clear that the activist is serious about pursuing it. Settlements
far outnumber proxy fights.”
Bill Ackman’s Pershing Square took its biggest ever activist position in
July when it paid $2.2bn for a stake in industrial gases group
Within three months Mr Ackman had persuaded the board to
retire its chairman
John McGlade and give Pershing Square control over two directorships – all
without uttering a negative word about the company.
whose lieutenants were invited this month on to the board of medical testing
says: “People sometimes say that I’m not mellow, but we really try to get
friendly when we are on boards.
“Boards are starting to conclude, mostly because of the success companies
have had when we got on the board, that we really help and ask, ‘Why go
through the fight?’ Their attitude is changing.”
Assets managed by activist hedge funds surpassed $90bn in the fourth
quarter, according to HFR, almost triple the total five years ago, giving
these investors more firepower than ever. Returns, however, have been
prosaic, even while global stock markets went on a tear, raising the
possibility that improved governance across corporate America might have
reduced the rich pickings once on offer.
Companies and their investment bank advisers are increasingly conducting
for an activist attack, and in the process identifying strategic weaknesses
that they fix even before a hedge fund shows up.
Mr Ackman, in a speech while visiting the UK in the autumn, tipped Europe as
a more lucrative ground for activism in the coming years.
Japan is also attracting attention thanks to the climate of reform ushered
in by Prime Minister Shinzo Abe. Dan Loeb’s Third Point took $1bn-plus
2013, though his overture to Sony suggesting it partially spin off its
entertainment business was rebuffed.
Some smaller activist funds are focusing on smaller companies, where the
reduction in Wall Street research coverage has been most acute. Cliff
Robbins, founder and chief executive of Blue Harbour, which manages just
under $2bn, pitches his fund as a free advisory service to the companies in
which it invests.
“Investment bankers don’t wake up in the morning thinking, ‘How can I help
this $2bn company?’” Mr Robbins says.
Others, however, see plenty of opportunity still in shaking up the largest
corporations in the world. They cite the example of
a demand by David Einhorn’s Greenlight Capital that the iPhone maker issue
preference shares to investors was defeated in February but was quickly
followed by the company announcing an extra $55bn return of cash.
“There are very high levels of cash on corporate balance sheets, which plays
to the activists’ theme of optimising capital structure,” says Doug
Braunstein, vice-chairman at
adding that the rising stock market is also separating the wheat from the
chaff and making underperforming companies more visible.
“We are actually at the beginning of a long-term sustainable level of
activity. It is an attractive environment for picking potential targets,” he