The Shareholder ForumTM


"Say on Pay" Proposals

Forum Home Page

"Say on Pay" Home Page

Program Reference


Barron's, February 17, 2009 article


Barron's Online

Features Main

A Golden Age for Activist Investing


A distressed stock market and a new focus on shareholder rights could mean fresh success for activist investors, even reluctant rabble-rousers.

WHEN THE CEOS OF THE BIG THREE U.S. AUTO MAKERS recently went to Washington, hats in hand, and arrived in three separate corporate jets, the country was shocked. Activist investors, however, weren't surprised. They have been shouting for years about unproductive corporate managers who have made fortunes at shareholders' expense while board members stood quietly by.

Now, with the equity markets down 40% and high-profile bankruptcies and bailouts occurring, the rest of the world is taking note. Even the U.S. government is insisting on corporate-governance improvements at companies that receive federal-bailout money. This enthusiasm for shareholder rights, coupled with distressed equity markets, means the sun, the moon and the stars have moved into alignment for activist investing.


Dan Picasso for Barron's

On the hot seat: The financial crisis has eroded confidence in corporate leaders and boards of directors.

When equity markets are prosperous, shareholder activism is harder to implement for traditional activist investors, and is generally unnecessary for passive investors. But activists, who are primarily value investors, today see some of the largest spreads ever between price and value. That is creating many opportunities for value enhancement. Passive investors see stocks down nearly 40% at a time when the macro environment and market noise are drowning out company fundamentals. They know they can't rely on the markets to create value, so they have to help create it themselves. As a result, many passive investors are becoming "reluctant activists."

For example, Mario Gabelli's Gamco Investors (ticker: GBL), which hasn't nominated a competing slate of board directors in many years, expects to make nominations to at least 10 boards this year, some of which have been made already.

Not only is shareholder activism likely to increase significantly, but the economic and political climate will make it much easier for activist investors to succeed. The economic crisis has eroded confidence in boards and corporate leadership. Shareholders have less patience for laggard management, indecisiveness and missteps, and are more likely to support an activist. Managers watched as stock prices declined and stock options fell substantially out-of-the-money. With increased pressure to get stock prices back up, it would be tough under any circumstances for executives to ignore activist overtures. But, given the significant expense and constant distractions of a proxy fight, it may be near-impossible now for management to justify resisting an activist shareholder's requests.

Accordingly, the 2009 proxy season is likely to see many more fights settled quickly. Such was the case with activist hedge fund Nanes Balkany Partners and Toreador Resources (TRGL), an energy company. It took only eight days and the threat of a proxy fight before Nanes Balkany got everything it wanted, including three seats on Toreador's board, the resignation of the chief executive and the termination of the company's poison pill. On the day of the settlement, the company's second-largest shareholder issued a press release supporting Nanes Balkany and the company's decision to settle.

While companies that choose to fight may use the poor macro-environment as an excuse for poor performance, this argument isn't likely to carry the day with many shareholders, particularly when an activist investor is looking only for a couple of board seats.

THE ECONOMIC AND POLITICAL LANDSCAPE also changes the types of activism in which shareholders engage. The biggest change, which began in 2008 and continues in '09, is that the impaired credit markets will make it difficult to implement financial-engineering solutions. This environment prompts activists to focus on operations, strategy and governance, rather than stock repurchases and special dividends. There are many companies whose operations or strategy fell short, and activists will identify them and implement plans to improve operations, cut costs and redirect investment.

Given today's backdrop, many activists are expected to emphasize net cash as an inducement to invest. Large amounts of cash give a company the financial flexibility to withstand economic stress, and make it a more attractive takeover target. Abundant cash also may be an indication that the stock is mispriced. In many cases, price/earnings ratios have been gravitating toward 10, without regard to cash balances.

One example: Micros Systems (MCRS), which provides enterprise information solutions for the hospitality and specialty-retail markets. The tech outfit has healthy recurring revenue, Ebitda (earnings before interest, taxes, depreciation and amortization) of $170 million, cash of $325 million and no long-term debt. It recently was trading for 9.8 times estimated earnings.

This year also is likely to see a significant increase in corporate/strategic acquisitions, which will compensate in part for the void in private-equity buyouts. Corporate acquirers have a low cost of capital and will have little competition from private equity in 2009. Activists not only will be open to discussing potential transactions with strategic acquirers, but often will seek them out. The activist-investor board member will want to be involved in negotiating the transaction to assure that stockholders receive the best value.

A prime example: Parmaceutical maker Abbott Laboratories ' pending acquisition of Advanced Medical Optics (EYE), a provider of eye-care products, for $22 a share, a 149% premium to AMO's $8.85 closing price a day earlier. ValueAct Capital, a corporate-governance-focused hedge fund, owned 14.3% of Advanced Medical, had a board seat and was on the committee that analyzed strategic options for the company. (For more on Abbott, see "Abbott Labs.")

The success of this transaction also is evidence of another activist contention: that shareholder bases have turned over, and current shareholders aren't fixated on what the stock was trading at 18 months ago, which in Advanced Medical's case was $35 a share.

HEFTY EXECUTIVE COMPENSATION WILL BE another hot-button activist topic in 2009. While this is rarely the main issue in an activist campaign, it resonates with large institutional investors. It has been put front and center in U.S. government bailouts, something not lost on investors and activist shareholders. In its recent activist initiative at tax preparer Jackson Hewitt (JTX), Shamrock Activist Value Fund cited the government's actions to support its bid to balance executive-compensation policies with the interests of shareholders.

The repricing of stock options and renegotiation of executive-performance targets has already begun. But shareholders now worry that without an activist or a big institutional investor on the board, the balance between their needs and management's needs will tilt sharply in favor of management. For example, with its stock down more than 50%, to $13.50 per share, Red Robin Gourmet Burgers (RRGB) recently commenced a tender offer to buy from its employees 1.6 million deeply out-of-the-money stock options with exercise prices of at least $32 per share, for an aggregate cost of $3.7 million.

The political climate, shareholder sentiment and opportunities available to activists are likely to make for a busy and exciting year for shareholder activism. There will be more activists and "reluctant activists" participating at board levels, and there will be fewer corporate jets at the disposal of management. The good news for management and shareholders? Fewer CEOs will need their jets to fly to Washington, hats in hand.


KEN SQUIRE is founder of 13D Monitor and, a research provider and consulting service specializing in shareholder activism. His e-mail address is




Copyright 2009 Dow Jones & Company, Inc.




This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was supported by Sibson Consulting to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of performance leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.