Beware of activist investors
Like it or not activist investors are here to stay and are radically changing the business landscape
typically involve some level of perceived underperformance, mistakes or non-transparent processes. Shareholders may take action when they believe stock prices are undervalued compared to industry peers, that conglomerates are misallocating capital and have businesses without synergies, that a specific transaction was illadvised or that executive pay and company performance evaluation processes are opaque.
Growing influence
In 2015, hundreds of companies worldwide, like General Motors, Dow Chemical, Nestlé, Xerox or Mondelez, were subject to socalled activist investors. 2016 has also been a big year for investor activism.
Investors David Einhorn and Carl Icahn have both used their large stock holdings in Apple to exert pressure on the company to make changes like returning capital to shareholders from the company’s massive cash reserves of around $150bn. In 2014, Trian Fund tried to use its influence as an investor to get PepsiCo to separate its snack and beverage arms and ultimately succeeded in having one of its advisors placed on the PepsiCo board of directors.
Bill Ackma of Pershing Square Capital Management, the 10th largest shareholder at Proctor and Gamble in 2013, was able to force the then CEO Robert McDonald out of the company by criticizing his performance and promising higher stock prices.
A dispute between Trian Fund (again) and the board of directors at DuPont over whether DuPont should have divided into two companies resulted in a victory for DuPont CEO Ellen Kullman who stood her ground and resisted Trian’s proposal. But, Kullman ended up resigning months later. DuPont subsequently merged with Dow chemical after being the focus of another activist investor firm, the hedge fund Third Point. The merger is still underway and calls for the company to spin off into three separate entities. Trian Fund is reported to have been consulted for input on the merger.
In 2013, Activist hedge fund manager, Dan Loeb of Third Point wrote a letter to Sony urging it to split up its entertainment and electronics businesses. The proposal put forth that shareholders be given a chance to invest further in Sony Entertainment, creating an infusion of capital, while streamlining its offer of electronics focusing on profitable products and cutting loss-generating ones.
Sony’s Board rejected Third Point’s proposal. Third Point expressed its “disappointment” that Sony was turning down its proposal and issued a statement saying that it would “explore further options to create new values for shareholders following talks with the Sony management”. Sony’s share prices proceeded to drop following the news.
In 2014, Sony announced the sale of its computer business to Japan Industrial Partners, Inc., one of the domestic funds specialised in restructuring businesses. The company also made a structural reform of its television business, spinning it off into a wholly-owned subsidiary later that year.
Should all companies beware of activist investors?
While activist investors don’t always succeed in getting exactly what they want, their actions can be highly influential even when they fail to achieve their specific goals.
What is certain is that they are here to stay, at least for the foreseeable future.
Your company needs to be prepared to be an activists’ target. Their rise is associated with a stronger focus on shareholder value. What’s the best way to prevent their attack? By maintaining strong company performance. Make sure that you maximise value across all of your businesses and, if you are a conglomerate, that there are solid synergies between your different enterprises.
Despite criticism, the empirical evidence is clear; share prices and operating performance at targeted companies often improve after activist involvement.
So it is best summed up by Warren Buffet who said: “If every company were well managed, there would be no reason for activists. The truth is, at some companies, the managers forget who they’re working for.” Nuno Fernandes is Professor of Finance at IMD, where he directs the Strategic Finance Programme and also Finance Fundamentals for Executives. He is the author of ‘Finance for Executives: A Practical Guide for Managers’