The Transition From the Corporate Raider to the Shareholder Activist

A few decades ago, the so-called shareholder activists of today were considered corporate raiders. Carl Icahn, a seasoned shareholder activist, was just one of the investors deemed to be a corporate raider through the 1970s and 1980s. What was seen back then as a negative force, is now starting to be seen as more of a positive force for the future of big corporations, sometimes unlocking very significant amounts of shareholder value.

Shareholder activists are typically defined as those investors who decide to accumulate large stakes in companies, many of whom with multi-billion-dollar market capitalization’s, before proceeding to utilize their shareholder voting rights to catalyze change. The typical hedge fund will use their own developed investment strategy, which will usually take a specific approach such as long/short equity, making passive investments and sometimes holding their positions in stocks for many years. In contrast, activist investors take a more hands-on, aggressive approach; rather than waiting for change to happen, they make change happen.

Some of these types of investors may seek to intimidate, but others are happy to work alongside their targets’ management teams, even by claiming a seat on the board. However, often the changes activist investors wish to incite are against what the currently inhabitant management teams believe to be optimal for their respective companies. Thus activist investors often target the managers themselves, arguing that they must be replaced. Other suggestions include downsizing and cost-cutting initiatives, right through to spinning off non-core operations and even complete liquidation.

To stymie the power of these activist investors, companies have historically taken measures such as poison pills, golden parachutes and leveraging their respective balance sheets to make themselves less appealing to potential hostile takeover artists. With the wide availability of debt financing in the 1970s and 1980s, the so-called corporate raiders could threaten their targets with putting together the financing needed to take over their entire organisations. This sometimes to led to what is known as greenmailing, where target companies were more or less forced to buy back the intruder’s stock at a giant premium so that they would leave. This was of course all to the great expense of the rest of the company in question’s shareholder base.

Fast forward to modern day, corporate raiders have gone through re-branding. Carl Icahn, who was once considered a villain, is now thought of by many as a hero. Whether or not you agree personally with this assertion, activist investors are certainly more long-term thinkers than their counterparts a few decades before. There are always exceptions to the rule, but activist investors today definitely seem to be instigating more lasting change in the companies they target, often backed by other shareholders through social media and even large financial institutions.

The fact is, anyone can be a shareholder activist. If you have access to some kind of media outlet and you own stock in a company, however small, if you can persuade other people to join your cause you too can become a shareholder activist of sorts. However, the real shareholder activists are those who not only manage large amounts of capital, which allow them to personally accumulate large equity positions, but they are also the ones who are in contact with large financial institutions who themselves have large equity positions in the same companies. Ultimately, if you buy a single share in Apple and start clamoring for the company to initiate a multi-billion-dollar buyback scheme, you are most probably going to get zero response. But if you are highly-connected, manage billions of dollars and take a multi-billion-dollar position in the company before organizing dinner with the CEO Tim Cook, you have much better odds.

In fact, while the campaign failed to go completely to plan, Carl Icahn did just that. Apple eventually succumbed to the idea somewhat, returning some $14 billion to shareholders through a buyback scheme. While $14 billion sounds like a lot of cash, the number is comparatively small when compared to Apple’s $140-160 billion bank account. Nevertheless, Icahn considered his campaign at least a success of sorts. He is not alone though; many activist investors are out there, including Dan Loeb of Third Point and Bill Ackman of Pershing Square. The activist investor is by no means a new breed, but plenty of such investors have cropped up over the years with their own funds, often creating very competitive returns for their limited partners.

Each of the more prominent activist investors have had their own, widely-publicized campaigns. Examples include Dan Loeb’s assault on Yahoo’s strategy and management team, Mason Morfit and his ValueAct Capital fund’s push to oust Steve Ballmer from Microsoft and Bill Ackman’s crusade for Beam to be spun out of Fortune Brands. Ackman’s fund yielded a healthy profit when Suntory acquired the spin-off just earlier this year in January 2014.

Looking into the future, shareholder activism looks to be continuing to integrate itself into the capital markets. Icahn sends out tweets to his thousands of followers on Twitter. He even released his own website dedicated to his efforts not long ago, namely the Shareholders Square Table. Social media has certainly helped recent activism trends to take off. Certainly when the more prominent hedge fund managers receive backing from swarms of other shareholders, targets cannot refuse to acknowledge the demands of the activists.

With the wide media coverage that this form of investing is taking, it is not unlikely that we will see many more entrants into this space going ahead, especially with the competitive returns activist-oriented funds are making relative to others. It is also interesting to see companies as large as Apple being targeted, which currently has a market capitalization of around $480B. Clearly, size is no longer a deterrent. Into the future, we could see greater control of corporate boardrooms too from the activists. Perhaps we could also see better-aligned and incentivized compensation schemes among senior managers; this has been a hot topic as of late, especially in the world of shareholder activism.

Looking into the future is always difficult, but it is certainly likely that shareholder activists will continue to receive encouragement from their limited partners and targets’ shareholder bases, as well as support from other financial institutions. We could even see more traditional value investors take a more activist approach in their investing style, to create more value for themselves are their investors. While it is debatable whether or not shareholder activism is a force for good in modern-day capitalism, but one thing is for certain: its most active and famous proponents are making a lot of money.

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