institutional investors like
mutual funds and pension funds were
content to take stakes in public companies, trust their managements and bet
on long-term gains. Companies trusted that these investors would be passive
shareholders and not rock the boat.
rise and increasing success of activist investors, however, are forcing big
money managers like
T. Rowe Price and Vanguard to question
these long-held assumptions.
and other big money managers, which now control a record share of public
company stock, are working with activist hedge funds behind the scenes,
pressing for change at underperforming companies in their portfolios and
lending their support to calls for management shake-ups. In some cases, the
institutional investors are even stepping out from the shadows to pick their
“This is the
biggest shift in the battle for corporate control since
private equity was invented in the
1980s,” said James Rossman, head of corporate preparedness at Lazard.
“Activists realize they can influence this concentrated shareholder base at
many companies, and they’re tapping into the desires of shareholders to see
change take place.”
It is now
common to see institutional investors support activist campaigns. T. Rowe
Carl C. Icahn’s opposition to the
leveraged buyout of
Dell last year. Southeastern Asset
Management, which worked with Mr. Icahn on a rival bid for Dell, also
quietly supported the Barington Capital Group’s campaign for change at the
traditional investors are not simply supporting activists once a campaign
has begun. They are constantly discussing a variety of companies, and in
some cases, the institutional investors are even giving ideas to the
William A. Ackman,
founder of the hedge fund Pershing Square Capital, has been approached
by large institutions about activist campaigns.
“Periodically, we are approached by large institutions who are disappointed
with the performance of companies they are invested in to see if we would be
interested in playing an active role in effectuating change,” said William
A. Ackman, founder of the $13 billion hedge fund Pershing Square Capital,
who is best known for his positions on
J. C. Penney and
Herbalife. Institutional investors even
have an informal term for this: R.F.A., or request for activist.
factors are contributing to the more robust dialogue between traditional
investors and activists. Many activist hedge funds have outperformed
traditional index funds in recent years, emboldening activists and causing
traditional money managers to take note.
of Altai Capital, a hedge fund that oversees $400 million, pointed to his
firm’s work at SunEdison, a
solar power company. Altai took a board
seat in late 2012 and began working more closely with management. Since the
hedge fund first became involved in mid-2012, shares of SunEdison have
jumped 970 percent, and the company now has a market value of $4.9 billion.
tracking the success of activist campaigns is imprecise, hedge funds that
pursued a proxy fight to its conclusion won 20.7 percent of the time last
year, according to FactSet. That is up from 9.5 percent in 2012 and 7.4
percent in 2011.
Michael Nagle for The New York Times
Daniel S. Loeb of Third
Point repeatedly had kind words for Sony when he sought to persuade it
to partly spin off its entertainment arm, avoiding an all-out brawl.
may have also done themselves a favor by cleaning up their image. Many
prominent agitators no longer issue the management-bashing poison-pen
letters that once characterized the industry. Even Daniel S. Loeb, who made
eviscerating company executives by letter into something of an art form, has
been more sparing in his use of the tactic. He repeatedly had kind words for
Sony when he sought to persuade it to
partly spin off its entertainment arm, avoiding an all-out brawl.
activists in a lot of ways have been given a bad rap because some used to
lob insults from afar,” Mr. Bajaj said. “I do think activism is becoming
more and more intelligent.”
institutional investors concur, adding that dialogue with activists has
increased markedly over the last year.
thing that’s changed is that more mainstream investors are willing to give
an audience to activists,” said an executive at one large institutional
investor. “In part, that’s because the activists have become more
sophisticated in how they present their arguments.”
And what was
once a knee-jerk reaction by many institutional investors, who previously
steered clear of activists, has softened into something closer to
have a house view, whether pro-activist or anti-activist,” said Glenn
Booraem, controller of the Vanguard funds. “We’re pro long-term value
between activists and institutional investors often begins even before a
fight has gone public. Hedge funds want to make sure that other big
investors in a company share their views before they take a big stake and
press for change.
before going public with its fight against Agrium, the Canadian fertilizer
company, the activist hedge fund Jana Partners talked to several of the
company’s top investors in a bid to gauge their support for its campaign to
increase the share price, including advocating the possible spinoff of the
company’s retail agricultural division. Had other shareholders not supported
Jana’s position, which was ultimately unsuccessful, the fund was unlikely to
have pursued it alone.
ValueAct, a relatively unpublicized activist hedge fund, took a small stake
Microsoft last year, it did so knowing
that some of Microsoft’s largest and oldest shareholders supported its view
that change was needed at the company. Though ValueAct had bought less than
1 percent of Microsoft’s stock, the company granted the fund a board seat,
recognizing that the hedge fund was speaking for other investors, too.
activists contend that they hold only passing conversations with
shareholders of prospective targets, believing that divulging information
about their plans could spur a rise in the companies’ stocks, making an
activist campaign significantly more expensive.
Management worked with Carl C. Icahn on a rival bid for Dell.
campaigns are underway, both activists and companies seek to enlist the
support of institutional investors. After Mr. Icahn took a stake in
Transocean, he met with the company’s
big investors at least six times before its annual meeting.
contentious situations arise with companies in our portfolios, we have
always found it useful to hear perspectives from both sides of the debate,”
said Donna F. Anderson, corporate governance analyst at T. Rowe Price. “This
approach enables us to make more fully informed decisions about the outcome
that would best serve the long-term interests of our clients.”
activists say, is a traditional money manager giving a bomb-throwing hedge
fund a specific target and goal. Another hedge fund executive recalled
hearing several years ago from a portfolio manager at a big institution
eager to force a sale of Dobson Communications, a rural cellphone service
provider. The portfolio manager couldn’t apply pressure directly on the
company, but he encouraged activists to take up the cause. It isn’t clear
whether hedge funds complied, but Dobson eventually sold itself to
AT&T for $2.8 billion in the summer of
“Institutional investors want to share the sick children in their portfolio
with someone who can help make them better,” said Bruce H. Goldfarb, chief
executive of Okapi Partners, a proxy solicitation firm.
circles, T. Rowe Price, an institutional investor with $614 billion in
assets under management, has gained a reputation for pursuing hedge funds
and encouraging them to take up an activist campaign. The firm denies it
suggests certain targets for activists but acknowledges it is in regular
dialogue with other investors about the companies in its portfolio.
At other big
firms like BlackRock, which manages $4.3 trillion, the lines are more
blurred. BlackRock denies that any of its portfolio managers pursue hedge
funds with ideas, but some portfolio managers are said to pass on certain
activist hedge fund managers are reluctant to publicly acknowledge that they
receive ideas from other investors, but concede in private conversations
that it is common practice to discuss stock ideas with institutional
at a big New York hedge fund said that the exchange of investment ideas
between institutional investors and hedge funds was typically more subtle.
“Shareholders talk to shareholders,” he said. “In the course of ordinary
conversation, it comes up.”
institutional investors now regularly supporting activists, some are even
taking the next step and effectively starting activist campaigns of their
the California State Teachers’ Retirement System, which manages $176
billion, teamed up with the hedge fund Relational Investors to undertake a
campaign to split the
Timken Company into separate steel and
industrial bearings businesses. Months later, the company agreed. Likewise,
in 2011, the Ontario Teachers’ Pension Plan worked with Jana Partners to
McGraw-Hill to spin off part of its
business. McGraw-Hill eventually broke itself apart, though company
executives said at the time that they had already been weighing a split by
the time Jana had arrived.
point, activists will not even be considered activists anymore; they will
just be thought of as ordinary investors, said Michael Carr, head of
Goldman Sachs’s mergers and
acquisitions group in the Americas. Already, he said, “the boundary between
long-only money managers and activists is starting to blur.”
A version of this article appears in
print on 03/19/2014, on page B1 of the NewYork edition with the headline:
New Alliances in Battle for Corporate Control.
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