Doesn’t Work With Tech Companies
For all their sound and
fury, activist investors, in general, bring little to the table with
December 12, 2015
Activist investing has been surging for years now, but beyond the
roaring stock-price appreciation the activists claim, the ultimate
payoff for companies, the economy, and for society is pretty dubious.
The “campaigns” waged by hedge funds are exploding. Activist funds’
assets under management surged to $120 billion in value this year from
just $30 billion in 2014, according to a report earlier this year from
Standard and Poor’s Capital IQ.
For technology companies in particular, activists have no real ideas
to contribute with regard to the development of great products and
services. They have only tactics for creating noise to boost stock
The biggest campaigns are high-profile affairs, such as Carl Icahn’s
successful badgering of Apple
(ticker: AAPL) to buy back its shares in vast amounts. Such
campaigns can be a boon for stock investors. Since Icahn first
announced his position in Apple in mid-2013, the stock has soared 70%.
But the actual contribution to the U.S. economy is nowhere near as
positive. Data show companies actually do worse by some financial
measures, such as growth and profitability, after having been raided.
TECH MAY BE PERVERSELY VULNERABLE
to activism precisely because of the unbounded promise it offers. Over
the past decade, information technology had the largest number of
campaigns among the 10 sectors in the Standard & Poor’s 500, according
to S&P Capital IQ. The five biggest targets in that period were
(MSI), Dell, Yahoo!
(YHOO), Adobe Systems
(ADBE), and Juniper Networks
(JNPR). In total, 209 tech campaigns were carried out in the last 10
years, versus 186 for the next most popular sector, consumer
Indeed, tech is the perfect justification for activists. If there’s
unlimited potential, there’s no reason not to agitate immediately,
Hardly. A broad review by Capital IQ of 1,218 individual activist
campaigns from 1997 through May of this year across numerous sectors
of U.S. stocks shows stock prices were goosed by activists without any
positive impact on financial performance.
The researchers tracked how stock prices did before and after
campaigns were announced. They used the 13D filings, a form investors
are required to file with the Securities and Exchange Commission once
they amass a 5% or greater position in a stock.
The review doesn’t include very large campaigns like Icahn’s, because
Icahn never acquired a 5% stake. At Apple, that would have required a
$21 billion investment.
The average size of these targets, however, was a mere $682 million.
In that sense they are perhaps more broadly representative than the
campaigns at Apple and the like.
Here’s the big picture: Investors holding a portfolio of such activist
targets would have gotten, on average, 8.2% of excess return relative
to the market in the two years following a 13D filing. If you add up
that excess return, over 18 years, it could lead to some $3 trillion
in market value created across those 1,218 companies, Capital IQ
estimates. That’s equal to roughly 13% of the $23.4 trillion
capitalization today of the Russell 3000 Index, the benchmark for
these activist targets.
In contrast, one of the presumed motives of such activism—to boost
return of capital to shareholders—surprisingly changed very little. In
aggregate, those 1,218 campaigns produced a mere $2.5 billion in
incremental distributions of cash to shareholders over 18 years,
Capital IQ estimates, based on the average improvement in capital
return ratios; that’s a third of a percent.
More profound and more disturbing is the nature of how the campaigns
targeted companies, and what effect they had on financial performance.
In general, Cap IQ found that the target companies’ stocks were no
more or less expensive than peers when they were targeted and no more
“distressed.” As Dave Pope, the lead author of the report, remarks, “A
lot of people think that activists are value players, but we don’t see
that,” given that they aren’t uncovering underappreciated assets.
NOT ONLY WERE
targets not distressed, many had above-average fundamentals. Targeted
companies, Pope and his team found, were more profitable than peers
before they became targets, based on earnings before interest, taxes,
depreciation and amortization and on net income margins. And they had
“efficiency” just as high as peers, meaning the rate at which they
generated cash from their assets.
The chief sins of the targets were threefold: They had slower revenue
growth than peers; they returned less to shareholders in dividends and
buybacks; and their shares had underperformed peers in the months
leading up to a campaign.
All of which could be a justification for agitation, except that the
financial metrics “did not show any improvement” two years out. In
fact, on average, targets’ revenue growth slowed, and their efficiency
fell, as did their profitability.
That seems surprising given that “you would expect those metrics to
improve” as stock prices rose, observes Pope. You would, unless, of
course, the motive all along of activism was to juice stock prices
without actually helping a company. The motives seem all the more
suspect as the tone of activism has gotten worse.
As Pope puts it, more and more campaigns have become “predatory,”
meaning that, instead of addressing obvious flaws in a business, they
have turned into campaigns of confrontation for the sake of
confrontation. “As activism gets more crowded, the low-hanging fruit
has been picked,” observes Pope. “The areas where you can make a
difference have become more competitive.” That may prompt a show of
force by activists without any real point to their activity.
WHAT IS TO BE
done? Not many tech CEOs probably want to speak out; it’s like poking
a hornet’s nest. One former chief, Ray Zinn, who ran chip maker Micrel
for 37 years until its acquisition by
Microchip Technology (MCHP)
last summer, says activists are “more like robbers. They found out
they could wreak havoc by taking over a company.”
One proposal he offers is to lower the filing bar for 13Ds to make
them mandatory once someone acquires even 1% of a company.
The bigger picture is that society has to determine it wants to
encourage activity that boosts share prices without contributing much
to the underlying prospects of the companies that are supposed to make
the economy flourish.
TIERNAN RAY can be reached at: