WALL STREET JOURNAL.
Activist Investors’ Secret Ally: Big Mutual Funds
Large investors quietly back campaigns to force change at U.S.
ValueAct Capital Management founder and CEO Jeffrey Ubben, left,
and President Mason Morfit have sought support from mutual funds
in their efforts to force change at big companies. PHOTO:
JASON HENRY FOR THE WALL STREET JOURNAL
Updated Aug. 9, 2015 10:38
When a low-profile
activist investor gained a board seat at
two years ago, corporate boards around the country were
stunned. How had a shareholder with less than 1% of the software
giant’s stock forced its way into the boardroom?
It turns out that
ValueAct Capital Management LP had some serious muscle behind the
scenes. Founder and Chief Executive Jeffrey Ubben and President Mason
Morfit had reached out to some of Microsoft’s biggest
stockholders—large mutual-fund companies not known for rocking the
boat—to ask for help.
Several of them,
including Franklin Templeton Investments and Capital Research &
Management Co., which together held morein a than 6% of Microsoft’s
stock, then contacted the company. Within five months, ValueAct had
its board seat.
Activist investors are
prevailing more than ever in their battles to force change at large
U.S. companies, in many cases because of support from big investors
who traditionally have stayed quiet. And that is changing the way U.S.
businesses respond to challenges from activist campaigns.
The shift comes as
activist investors set their sights on bigger companies. Last week,
investor William Ackman’s Pershing Square Capital Management LP
a $5.5 billion stake in food giant
It also emerged that ValueAct has taken a
roughly $1 billion stake in
Large mutual funds have
long been seen as friends of management who buy a stock because they
liked what a company is doing. A decade ago, they would rarely even
pick up the phone to talk with activists bent on challenging the
status quo, according to activists and corporate advisers who
specialize in such situations.
These days, mutual funds
often are siding with activists. They quietly have backed some of the
most prominent activist campaigns, including Starboard Value LP’s
removal of the entire board at
Darden Restaurants Inc.
last year and a push at
General Motors Co. this year for a quicker share buyback. Although
Nelson Peltz ultimately
lost his campaign to get on the board of
Co., he came close thanks to the support of many investors.
In a survey this year of
more than 350 of mutual-fund managers, Rivel Research Group, which
polls investors for companies, found that half had been contacted by
an activist in the past year, and 45% of those contacted decided to
support the activist.
“In contrast to the
situation of just a few years ago, companies must examine their
long-only shareholders with a critical eye,”
bankers wrote to clients
earlier this year. “There are no ‘management friendly’ investors.”
That shift is changing
the way fights play out in boardrooms. Rather than face one loud
activist, companies sometimes are forced to contend with pressure from
multiple shareholders. That has made some companies more receptive to
activists and their ideas, such as share buybacks, cost-cutting and
asset sales, even as debate continues about how such moves affect the
health of companies.
Activist investors take
stakes in companies they think are underperforming and push for
financial, strategic or leadership changes. Last year, activists
gained board seats at a record 107 companies, 91 of them through pacts
negotiated with the companies, according to data provider
FactSet. This year has gotten off to an even faster start, with
activists gaining seats at 86 companies in the first half alone.
When companies resist,
they are more often losing shareholder votes. In 2014, activists won
in a record 73% of battles for board seats in the U.S., up from 52% in
2012, according to FactSet.
involvement of mutual funds comes as retail investors have been moving
money from stock-picking mutual funds to index funds and other funds
that track baskets of securities. That is increasing the pressure on
mutual-fund managers to beat the market, investors say.
“Everybody is looking
for an edge,” says Peter Langerman, the head of a large mutual-fund
unit at Franklin Templeton, which oversees about $75 billion.
Some mutual funds are
voicing public support for activists’ positions. But many funds worry
that admitting to working with activists will cost them access to
management at companies in which they hold stakes, according to
investors and corporate advisers.
Private talks between
activists and mutual funds are becoming more common.
In April at the Milken
Institute’s annual conference in Los Angeles, a group of activists and
major institutional investors gathered in a closed-door meeting to
discuss their relationships, according to one person who attended.
They debated whether activists work in the long-term interest of all
shareholders, or are only after shorter-term profits. The two groups
agreed that companies are listening more to investors of all stripes,
which they saw as a positive.
The 10 largest
shareholders of an S&P 500 company, on average, hold 44.7% of the
company’s stock, says
banker Jim Rossman, who specializes in helping
companies deal with activists. That means winning the support of major
shareholders can put an activist on the path to victory, while losing
it can spell doom.
The average size of an
activist’s stake in a target company shrunk to 6.1% last year, from
7.7% in 2006, according to FactSet, which suggests that activists can
spend less and still win.
Steve Ballmer announced in August 2013 that he would step down
as chief executive of Microsoft and retire.
Photo: Stuart Palley for The Wall Street Journal
Companies recognize the
importance of courting their institutional shareholders and have been
bulking up investor-relations departments, according to corporate
advisers and investor-relations experts. Corporate lawyers and bankers
urge companies to articulate a clear strategy or risk having an
activist-recommended strategy sounding better. Some companies are
having directors engage with shareholders regularly.
Institutional funds, for
their part, have “realized they have influence” and are saying, “We
have a responsibility to have a sophisticated approach to voting,”
Lazard’s Mr. Rossman said.
funds have moved slowly into voting against management. They started
on governance issues, such as forcing annual elections for directors
and rejecting corporate pay in nonbinding referendums. This year, a
widespread push forced companies from
General Electric Co.
change their corporate rules and allow shareholders to more easily
In the spring of 2013,
San Francisco-based ValueAct, which has about $20 billion under
management, asked for a single board seat at Microsoft for either its
chief executive, Mr. Ubben, or its president, Mr. Morfit, according to
people familiar with the request. ValueAct indicated it would fight
publicly for the seat if it couldn’t reach an accord.
Messrs. Ubben and Morfit
aren’t known for starting such proxy fights. ValueAct representatives
have served on the boards of
Valeant Pharmaceuticals International Inc.
Adobe Systems Inc.
Microsoft plan was ambitious, given its less than 1% stake. But it has
been building relationships with mutual funds for years. Tapping those
contacts, Messrs. Ubben and Morfit called investors such as Martin
Flanagan, chief executive of Invesco Ltd., and Mr. Langerman of
Franklin Templeton’s Mutual Series unit, according to people familiar
with the conversations.
Their pitch: They wanted
a board seat, and, if necessary, planned to run a campaign against the
Steve Ballmer, then Microsoft CEO, these people say. ValueAct
claimed management had been slow to adapt to new technologies and had
lost the pioneering position it once held, hurting shareholder value.
It wanted Microsoft to refocus on its technology aimed at large
companies, such as software for corporate computing centers and a
version of its Microsoft Office software that had been remodeled for
the Web and mobile devices, these people say.
Franklin’s Mr. Langerman
and his team spoke several times with ValueAct executives to hear
their pitch and agreed that Microsoft needed a change. Later, in
discussions with Microsoft, they urged support for the activist’s
position, according to those familiar with the talks.
Capital Research, a
mutual-fund giant with $1.5 trillion under management, had been
expressing concern to Microsoft about its slumping share value before
ValueAct came along, according to people familiar with the talks. When
the firm’s technology analyst Paul Benjamin spoke with ValueAct
executives, they agreed that Microsoft needed help quickly. Mr.
Benjamin contacted Microsoft board members and urged them to work with
In November 2012, in a
sign of the brewing discontent, Capital Research’s funds and others
withheld their support for the re-election to the board of Messrs.
Ballmer and Gates, according to vote-tracker Proxy Insight.
The two directors were
still elected by a wide margin. More than 96.6% of shares voted for
both, but the other directors got 99%. Such “no” votes are rare.
Capital Research’s American Funds, for instance, back management in
97.4% of all campaigns, according to Proxy Insight.
In August 2013,
Mr. Ballmer would retire. The company has said the leadership
change was in the works before ValueAct arrived, and that the fund
played no part in Mr. Ballmer’s departure.
After his retirement was
announced, Microsoft reached out to ValueAct to ask if it still wanted
a board seat, according to people familiar with the discussion.
ValueAct said it was happy with the change, but wouldn’t budge on its
The following week—just
before a deadline for an investor to launch a fight for
seats—Microsoft announced Mr. Morfit would join the board.
which owns the Olive Garden chain, triggered a fight with activists
when its board decided last year to sell its Red Lobster chain even as
shareholders were seeking a vote on the matter, people on both sides
Starboard, fellow activist Barington Capital Group LP and Darden duked
it out publicly. Starboard released a 300-page PowerPoint presentation
that criticized everything from Darden’s management to the lack of
salt in Olive Garden’s pasta water.
Capital Research, once
the largest shareholder, tried to broker a settlement. Capital
Research executive Gregory Wendt acted as a go-between with Darden
management and Starboard. He tried to find a way to change the board
but leave some members in place for continuity’s sake, a common
concern among institutional holders, people involved in the fight say.
The fight turned bitter,
and no settlement was reached.
Investors voted out the entire board last October, a particularly
whopping defeat for management. Capital Research voted for all 12 of
Starboard’s nominees, say people familiar with the vote.
At times, mutual funds
offer only qualified support for activists.
Investor Harry J. Wilson
went public in February with plans to push General Motors for a stock
buyback and a board seat. Mr. Wilson’s team quietly put out feelers to
big investors to see if they would support him, according to people
familiar with his campaign.
At Franklin Templeton’s
offices in Short Hills, N.J., Mr. Wilson made his pitch to portfolio
manager F. David Segal and others. He said he wanted GM to repurchase
$8 billion in stock.
Shortly thereafter, Mr.
Segal called GM’s head of investor relations and said Franklin’s
Mutual Series unit was sympathetic to Mr. Wilson’s views but thought
the buyback number was aggressive. Mr. Segal told GM that while
shareholders had been grumbling about the issue in the past, it had
become more public and the company needed to address it head-on,
according to people familiar with the call.
In early March, GM
announced it would undertake, earlier than originally planned,
a $5 billion buyback that was already in the works. Mr. Wilson
pulled his request for a board seat a month after he had made it.
also has gotten fast action at times.
In January, ValueAct
released a letter it wrote to stock-market-indexing company
ValueAct wrote that MSCI had rebuffed its attempts to
get a board seat and hadn’t even checked the references ValueAct had
sent. Other MSCI holders quickly weighed in. Independent Franchise
Partners LLP and
Group, both top five holders, wrote
letters arguing ValueAct’s track record warranted a spot on the board.
Three weeks later,
ValueAct got the seat and two others.
David Benoit at
firstname.lastname@example.org and Kirsten Grind at