Shareholder Activism Here to Stay Because It's Good Business

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By Stephen Joyce and Madi Alexander

Aug. 25 — The number of activist campaigns may have fallen but companies shouldn't rest on their laurels.

Shareholder activism is here to stay and that's due to one key reason: it works as a business model, lawyers and hedge fund professionals say. They also predict that technology companies will continue to be the leading targets of activist investors.

Between Jan. 1, 2011, and Aug. 24, shareholder activists launched 473 campaigns against public companies, according to data tracked by Bloomberg. Technology was the most targeted sector—the very first campaign of 2011 was launched by billionaire activist investor Carl C. Icahn against Motorola Mobility Holdings LLC and one of the most recent campaigns was launched July 6, 2016, when Raging Capital Management LLC targeted DSP Group Inc. As of Aug. 24, the share price of DSP, a wireless chipset maker, was up 20.4 percent since the campaign was launched by the fund and its chairman, Bill Martin.

The number of campaigns launched in the first six months of a calendar year increased 200 percent from 2010 to 2014 but then slowed before decreasing. Indeed, while 50 campaigns were launched in the first half of 2015, just 31 were launched in the first half of 2016—a decline of about 39 percent, the data showed.

The fall in the number of campaigns may be due to the significant scrutiny that activism has been subjected to over the last six months, Vinson & Elkins LLP mergers and acquisitions partner Kai Haakon E. Liekefett, New York, told Bloomberg BNA. “Activism is just a very dangerous, very risky business strategy,” he said.

Activists Targeting Tech Companies
Fund, Asset Growth

Corporate attorneys and fund managers said activists began to materially ramp up their activities around 2010, when they started to outperform on a regular basis traditional market barometers such as the S&P 500 index as well as more traditional buy-and-hold hedge funds. Another reason for the uptick was because activists took advantage of market valuations impaired by the 2008 financial crisis.

In 2010, a total of 39 campaigns were launched, according to the data. That number increased to 59 in 2011. By 2012, traditional buy-and-hold hedge funds were underperforming the market while many shareholder activists were outperforming the market. That fueled an increase in the number of activist funds as well as the amount of money flowing into the funds, Covington & Burling LLP corporate governance and mergers and acquisitions lawyer Leonard Chazen, New York, told Bloomberg BNA.

Activism is likely to continue to be an important phenomenon, Chazen and others said, because in the right circumstances, investor activism simply works. For instance, Glenn W. Welling's Engaged Capital announced a campaign against Outerwall Inc. in 2016 and exited after about six months with a 93.8 percent gain, the data showed.

Activists aren't guaranteed success, of course, and the notion they can turn quick profits with little work is refuted by some campaigns which have taken months, or even years, of meticulous research to develop and deploy. And market forces can always turn against an activist: Icahn Associates, for instance, targeted Hertz Global Holdings Inc. in August 2014 and to date hasn't sold its shares, which have lost 59.5 percent of their value.

Icahn did better with the one-year investment in Netflix Inc. he closed out in 2013 after realizing a 363.5 percent gain.

Activists Campaigns
Tech Target

Activist campaigns targeted technology companies 111 times since January 2011, more than any other sector. On the other end of the spectrum, utility companies were targeted just four times since 2011 by activists that included Nathaniel August, founder and president of Mangrove Partners, and Clint D. Carlson, president of Carlson Capital LP.

Several reasons explain why technology companies are chief activist targets, lawyers said. Many tech companies are started and then led by creative technologists whose skill sets may not prepare them for running a publicly traded company. Activists may introduce financial efficiencies and corporate-governance standards at technology firms and materially improve the firm's share price, they said.

The consumer discretionary sector attracted the second largest number of campaigns since Jan. 1, 2011, in part because many activists think they well understand how these types of companies—including department stores and restaurant chains—work, and may conclude they can boost stock prices without large investments of time or money, the corporate attorneys said.

Financials, industrials and health-care companies, respectively, followed the consumer discretionary sector as the most popular targets, according to the data. Campaigns targeting the health-care sector doubled, to 12 campaigns, from 2014 to 2015, while campaigns introduced against industrial companies such as General Electric Co. and Eastern Co. dropped to six from 12 during the same period, the data showed. Campaigns launched against materials firms, including SunCoke Energy Inc., Alcoa Inc. and Boise Inc., remained somewhat constant between 2012 to 2015, with a slightly larger than average increase in 2014, the data showed.

Analysts and lawyers warned the data could be skewed by how “activist investor campaign” is defined and because activists may target a company but aren't required to disclose their holdings or their conversations with a target's management. Other times shareholders may announce a “campaign,” but do little else, in hopes of driving share prices up, they said.

Hedge funds with the most reported campaigns during 2011 to 2016 included Starboard Value LP with 35 campaigns, Icahn Associates (29), Elliott Management (27), Clinton Group Inc. (24) and Ancora and ValueAct Capital, each with 20 campaigns, the data showed.

Changes in Legal Practices

Activist hedge funds differ from their buy-and-hold brethren or other private equity funds because their motivation is to turn profits—the quicker the better—even if that means dismantling or selling the company within months. Strategies differ. The data showed the two most popular tactics employed by activists are pushing to replace directors on corporate boards and recommending specific transactions, such as asset spin-offs, divestitures and even selling the entire company.

One hedge fund manager likened hedge fund activism to traditional value investing with the added, but perhaps unmentioned, threat of a proxy battle if activists' concerns are ignored.

Several lawyers said the increase in activism during the past five years has fundamentally changed their practices, shifting from dispensing traditional merger or acquisition advice to helping companies defend against an activist fight.

Sometimes long-term clients work with their outside counsel continually while other times companies with little experience with activism reach out to lawyers specializing in activism defense when they're targeted, the lawyers said.

“It's very intense work and very time-sensitive work and very high-touch work,” which requires senior-lawyer attention, Kirkland & Ellis LLP mergers and acquisitions partner Daniel E. Wolf, New York, told Bloomberg BNA. “It is going to continue being an important part of our practice and I think it's one that does constitute a big demand on our time,” he said.

Others agreed. “Five years ago this was just a hobby of mine. I was primarily representing public companies in M&A. Nowadays shareholder activism, proxy fights are just about 100 percent of what I do,” Liekefett said.

“That alone tells you a lot about how that kind of practice has evolved in the last five years,” Liekefett added. “I almost don't have the time to do any M&A deals anymore.”

To contact the reporters on this story: Stephen Joyce in New York at sjoyce@bna.com ; Madi Alexander in Washington at malexander@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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