WALL STREET JOURNAL.
Are Activist Investors Helping or Undermining American Companies?
Journal examines 71 campaigns at big companies, finds runaway
winners, a few duds
Activist investors, from left to right: Daniel Loeb, William
Ackman and Carl Icahn.
Oct. 5, 2015 1:55 p.m. ET
The rise of activist
investing has sparked debate across markets, boardrooms and even
during the presidential campaign: Are activist shareholders good or
bad for business?
The Wall Street Journal
examined that question with a comprehensive look at what happens to
large U.S. companies after an activist arrives. The conclusion:
Activism often improves a company’s operational results—and nearly as
Activist Investor Report
Click to see what happened at large
U.S. companies that were targeted by activist investors.
There has been a marked
rise of activist investing over the past several years, with
hedge-fund figures such as
William Ackman and
Daniel Loeb buying up stakes in
some of the nation’s biggest companies, such as
Procter & Gamble Co.,
Apple Inc., pushing for changes
buybacks to breakups.
In the latest moves, Mr.
Peltz’s Trian Fund Management LP on Monday announced one of activism’s
biggest investments ever,
a $2.5 billion stake in General
Electric Co. Also Monday,
Ellen Kullman said she is
stepping down as chairman and chief executive of
DuPont Co., whose shares have
struggled since the chemical giant in May blocked Trian’s bid for a
The Journal looked at 71
campaigns against companies with market capitalizations of more than
$5 billion over a period dating back to 2009, the start of the surge
The review studied changes at
these companies in earnings, margins, corporate spending, employee
efficiency and shareholder return versus peers.
The resulting data
bolster the increasingly popular conclusion that the best corporate
response to activism isn’t for a board or chief executive to
reactively shun an activist, or to completely acquiesce to any
demands. Instead, companies may be better off analyzing each proposal,
and the track record of the activist making it, some advisers say.
“The focus is changing
to whether the idea is good or bad,” says Avinash Mehrotra, co-head of
Goldman Sachs Group Inc.’s
activism defense and shareholder advisory group. One key factor in
judging an idea’s merits, he said, is the time frame an activist is
The review shows that
shares of large companies confronted by activists are more likely to
outperform stocks among their industry peers than they are to
underperform. But the differential isn’t great. Slightly more than
half, or 38, of the situations in the Journal study led to better
shareholder returns than industry peers for the period studied after
the activist went public. In the end, the median campaign beat peers
by just under 5 percentage points.
Investor Report Card
Nice Guys Finish First
Icahn vs. Forest: a Lesson in Activism
The Methodology Behind the Journal’s Study
At the same time,
companies in the study slightly underperformed industry peers in terms
of growth in earnings and slightly beat them on profit margins. As for
capital spending as a percent of operating cash flow—seen as a measure
of reinvestment—of the 48 companies in the study with good data for
that measure, 25 raised spending or left it at the same level, while
23 lowered it.
While much has been
written about the rise of activism, its long-term effect on companies
remains little understood and hotly contested. Some contend activists
are a much-needed check on corporate leaders, keeping them accountable
for their decisions and spending. Others say that activists scare
executives from wise decisions that need time to pay off. Still others
say it is case by case, a view the Journal’s data support.
Even those on opposing
sides of the debate have recently suggested that the truth is
somewhere in the middle.
Laurence Fink, CEO of money
BlackRock Inc., has argued the
economy is at risk because of the kinds of short-term moves often
associated with activists, although he says he doesn’t mean all
activism is bad for companies.
Hillary Clinton has pledged tax reforms
targeting “hit-and-run” activists,
though she also says some activists help hold managers accountable.
increasingly say not all campaigns benefit companies.
“We definitely do not
believe that all activism today is a good or a catchall,” veteran
Carl Icahn said in a recent
interview. “There are bad activists, and we agree that it’s bad. All
they want to do is get in and rock the boat and make a quick trade.”
In aggregate, the
Journal data show, the best chance an activist has at driving
outperformance at big companies is by getting a board seat, either for
their own employees or a nominee they trust. Of the 38 situations in
which activist-dogged companies outperformed industry peers, activists
got a say on the board in 24. The outcome suggests that moving the
needle at a big company—where leadership is already likely fielding
advice from a host of bankers, lawyers and analysts—involves getting a
voice in the boardroom.
Some activists regularly
seek board representation, like Mr. Icahn, ValueAct Capital Management
LP, Trian Fund Management LP and Relational Investors LLC. Their
Adobe Systems Inc.
and Forest Laboratories Inc.
ValueAct used the board
representation it had in all seven of its investments to outpace its
rivals in the study. The San Francisco-based firm, whose founder and
chief executive Jeff Ubben has been outspoken about his industry
needing to avoid short-term profits at the risk of tarnishing
themselves, had all seven of its investments in the survey beat peers,
with a median 16.5 percentage points above peers. Mr. Ubben was
recently nominated to the board
21st Century Fox, which until
mid-2013 was part of the same company as Wall Street Journal publisher
Others clearly see the
value of board intervention in big companies as well. In the 71
campaigns the Journal reviewed, 46 sought board representation and 40
Still, board influence
doesn’t ensure shares will rise: Sixteen companies that saw activists
get on the board underperformed their peers. That included
J.C. Penney Co., where Mr.
Ackman’s intervention contributed to an attempt to change corporate
strategy that fell flat.
J.C. Penney was the worst performer
in the study compared with peers, and had the second-worst
total-shareholder return. Only
bankrupt energy company
Walter Energy Inc.
came in worse.
Far fewer activists
working at the large-company level seem to bother with one of the most
common requests for activists—stock
buybacks, a generally shareholder friendly way to spend
corporate cash. In the sample, activists sought buybacks in 25 of 71
The message: If you’re
going to target a big company, you’ve got to get more creative than
just asking for a cash payout.
David Benoit at
firstname.lastname@example.org and Vipal