Investing: shareholder activism enters the mainstream

The founding class of shareholder activists, once scorned as “corporate raiders” and “greenmailers” out for shortterm results at the companies they targeted, have grown up and spawned a new generation. They have even been granted their own moniker — the “sons of activists.”

Managers such as Scott Ferguson, the first analyst Bill Ackman hired at Pershing Square in 2003; Alex Denner, a Carl Icahn acolyte; and Quentin Koffey, who spent seven years at Elliott Management before joining DE Shaw to launch its first activist practice, have struck out on their own and are garnering attention from investors and corporate management alike.

Although more than willing to launch a proxy fight or file a lawsuit, many of the up-and-coming generation are eschewing the public disputes and open confrontation that made their former bosses famous. Instead their style of investing — more data- driven, eager to work with management behind the scenes and to hold positions for longer — shows just how activism has evolved.

“The goal is the same, making money,” says Joseph Perella, the co-founder of Perella Weinberg Partners, the New York investment bank. “[But] there are more players in the activism space now and more importantly, they are much more institutional than back when activism was getting started in the 1980s.”

Managers are now more focused on making money for their investors, rather than just themselves, he adds.

Activists had one of their busiest years ever in 2017, deploying $62 billion in campaigns, more than twice the amount of money spent in the whole of 2016 says Lazard. They are also more influential forcing change at global companies such as Nestlé, DowDuPont and Procter & Gamble — while managing the money of pension funds, university endowments and charities around the world.

The biggest names in shareholder activism — Mr. Icahn, Paul Singer of Elliott Management, Nelson Peltz at Trian Partners, Jeff Ubben of ValueAct and Barry Rosenstein of Jana Partners — are not necessarily slowing down, but the field is getting more crowded as their former portfolio managers strike out on their own.

“They are definitely respected and companies do pay attention when one of these ‘sons of activists’ shows up at their doorstep,” says Rich Grossman, a partner at New York law firm Skadden Arps, which defends companies against activist campaigns. “Some of them have raised significant amounts of money in their own right and have substantial funds at their disposal.”

Activism emerged in the 1980s, with the likes of Mr. Icahn, now 81, and Mr. Peltz, 75, buying stakes in companies and then leveraging them to lobby for change. They went on to lead campaigns against the likes of RJR Nabisco, AIG and Heinz. The most common requests were for spin-offs, a sale of the company, a management shake-up, board seats, share buybacks or a restructuring.

Often criticized as being short-term shareholders who bought stakes in companies and demanded money, or some type of pay-off, to go away — dubbed greenmail — activists have sought to rebrand themselves as “constructive activists”, or even “highly engaged shareholders.”

While some remain on the more aggressive side, many stress that they are holding positions for longer and not clamoring for share buybacks or quick sales, but rather urging changes they claim will help the company long-term.

“Greenmail doesn’t really exist any more . . . the activist investors are acting for all shareholders now, not just to get a quick payout for themselves,” says Andrew Bednar, a partner at PWP. “Activists have had to become more operational, strategic and longer-term investors in order to deliver company changes that drive shareholder value. The quick sale for a premium is less common today.”

The success enjoyed by activists has made some companies more receptive to settling behind closed doors rather than allowing battles to spill into the public arena, which has led to a less hostile style of activism.

“Shareholders feel that there is no monopoly on good ideas,” says Mr. Grossman who coined the phrase “sons of activists.” “They don’t always agree with the activists, but I think management teams and boards are in large part listening to what they have to say and evaluating what makes sense.”

The number of public boardroom battles between activists and companies in the US, known as proxy fights, fell to a five-year low in 2017, according to data from FactSet, despite activists spending more money in their campaigns than ever before — Nelson Peltz has taken a $3.5-billion stake to win a seat on the P&G board — as they aim for larger targets.

Jim Rossman, the head of shareholder defense at Lazard, says that activism has now “gone completely mainstream” in terms of how many companies face attacks, and that it is now “rare” for him and his colleagues to advise a board that doesn’t have a director who hasn’t already experienced an activist campaign.

“There is no company immune, there is no inoculation shot you can get to avoid activism if you’re a major global company,” he says. “It used to be you’d go into boards and they’d ask, ‘tell us who these guys are, are they really staying around, and are they serious, and can’t we just tell them to go away?’ That’s gone. There are now two or three people in every boardroom who have experienced it and can reference their own war stories.”

But Marty Lipton, the godfather of shareholder defense and a founding partner of the law firm Wachtell, Lipton, Rosen & Katz, says that hedge fund activists are “changing and taming their strategies” because of a growing wariness of their intentions.

“Shareholders are increasingly concerned about how the short-term goals of activist hedge funds are undermining the long-term value of their investments. [They] are also worried about the impact these strategies have on other stakeholders, which can include local communities, employees and the environment,” Mr. Lipton says.

Despite their omnipresence, the older generation mostly underperformed the newer guard last year. Mr. Ackman and Mr. Peltz had lackluster returns, while Mr. Ferguson’s fund, Sachem Head, brought in close to 13%, and Sarissa, run by Mr. Denner, was up about 15%, say people familiar with the funds. Marcato, an activist fund run by Mick McGuire, another former Pershing Square manager, returned more than 25% last year. According to data from eVestment, activist funds with less than $5 billion in assets under management outperformed those with more than $5 billion over the past two years.

Other members of the younger generation have already made names for themselves: Keith Meister, an Icahn protégé, has built Corvex Management into a $7.4-billion fund; Mason Morfit took over at ValueAct from Jeff Ubben last year as its chief investment officer; and Jesse Cohn became the youngest-ever partner at Elliott Management aged 36.

Marlin Naidoo, the global head of capital introduction and consulting at Deutsche Bank, who helps hedge funds raise assets from large institutional investors, says the younger generation are benefiting from investor appetite for new managers and inflows to activists.

“Investors typically like something that is newer,” he says. “With a lot of the established managers, investors have had a decent amount of time to take a view as to whether they want to allocate to them or not.”

To date the 48-year-old Mr. Denner has been among the most successful of this new wave. Last month, Sanofi the French pharmaceutical company said it would buy Bioverativ, a US biotech group focused on hemophilia treatments, for $11.6 billion — a premium of about 64% to where it was trading before the deal was announced. A year earlier, Ariad Pharmaceuticals was sold to the Japanese drug maker Takeda for nearly $5 billion, a 75% premium.

At the center of both deals was Mr. Denner, whose activist fund was among the largest shareholders in the target companies. Sarissa invests solely in biotech and pharmaceutical groups and Mr. Denner, who spent about five years working for Mr. Icahn, manages just over $600 million at the fund, making him one of the more niche activists.

In the Ariad campaign, Sarissa bought a 6.2% stake in the company in late 2013, when the shares were trading at around $3. The company was struggling: its shares had plummeted after the US Food and Drug Administration put a partial clinical hold on enrollment for trials of its leukemia drug, Iclusig, over concerns it caused blood clots.

Within two years, Mr. Denner had ousted Ariad’s chief executive, Harvey Berger, and won two board seats, including one for himself. The company, in its attempt to fend him off, adopted a poison pill strategy, blocking him from taking a larger stake than he already held. Despite that, Forbes estimates that Mr. Denner made about $260 million on the deal — after Takeda offered $24 a share for the drug maker in 2017.

“The best thing that ever happened to shareholders of Ariad is that he made quick work” of the company’s attempts to bar the door against him, says one person involved in the deal. “He bought the stock in the low single-digit dollars per share, became the chairman, found a new CEO and a few short years later sold the company for $24 per share in cash.”

Mr. Ferguson, 43, rose to the position of partner at Pershing Square before leaving in 2012 to start Sachem Head Capital Management, named after an area on the Connecticut coast where he grew up. The midsized fund manages just over $ 4 billion. Although still dwarfed by the largest activists like Elliott, which oversees more than $34 billion in assets; ValueAct, which handles about $ 15 billion; and Third Point, which has around $ 17 billion, industry watchers say Mr. Ferguson has the potential to become a big player in the sector.

He is one of a growing number of US activists looking to Europe for investment opportunities. According to Lazard data, the amount of money deployed by activists in Europe last year was $22 billion, more than double the $10-billion annual average spent on the continent from 2013 to 2016. Nearly 30% of campaigns last year were against European targets, primarily driven by US activists looking for undervalued stocks.

Last year, Mr. Ferguson took a 0.40% stake in the $40.2 billion drug maker Shire, and is pushing the UK-listed company to spin-off some of its divisions or possibly put itself up for sale. The fund has also led activist campaigns against Autodesk, the US software company, the American hospital staffing supplier TeamHealth and the payments group Worldpay. Whitbread is also under pressure from Mr. Ferguson’s lobbying to spin off its Costa Coffee chain.

Despite spending nearly a decade with Mr. Ackman, Mr. Ferguson seems reluctant to seek the limelight like his former boss. One manager who worked with him at Pershing calls him “smart, capable,” but likely to be “boring” in terms of his public profile.

“He’s thoughtful, and he’s taking his time to develop his ideas,” says a banker who advises on shareholder defense. “People think of him as a straight shooter, not someone who is difficult to deal with.”

Mr. Koffey, 40, joined DE Shaw in May last year to help build the $45-billion hedge fund’s activist practice. Its first public move was in EQT, a US energy group, where it lobbied the company to split its production and midstream businesses. The move was in line with Mr. Koffey’s experience — he spent seven years at Elliott mostly focused on the oil and gas sector.

But it was DE Shaw’s settlement with the US home improvement retailer Lowe’s last month that indicated the fund’s willingness to take positions in sectors outside energy. The retailer bowed to activist pressure to add three new directors to its board following what it called “constructive discussions” with the fund. The entire campaign was kept private until the settlement.

For some industry watchers the episode underlined a change in approach, that this generation is not just less confrontational in public, but also easier to work with behind the scenes.

“Jeff Ubben used to stalk around boardrooms trying to intimidate directors, and Bill Ackman would just keep calling every eight minutes,” says a lawyer who worked opposite both of them. “The Fergusons and Denners of the world aren’t going to try to intimidate anyone.”

Additional reporting by James FontanellaKhan in New York