Nowhere is money more admired than on Wall Street. But in many cases, billionaires are the subject of fear rather than fandom. All it takes is one strong-willed tycoon to turn a major corporation upside down. In recent months Pepsi, Sony, and Dell have all been hijacked by billionaires acting as activist investors. In fact, Activism Monthly says that in just the past three months, 57 companies have been targeted by billionaires, usually through hedge funds.
Activist investors, also known as corporate raiders, identify companies which they believe contain hidden value. Billionaire T. Boone Pickens once said, “It may smell like manure to you, but it smells like money to me.” With activist investing, billionaires like Pickens buy a substantial amount of stock in a company. Then they use their voting rights to start pushing for change in hopes it will unlock a company’s true worth. Billionaire Bill Ackman has said, "The investment business is about being confident enough to know that you’re right and everyone else is wrong.”
Very often activist investment involves ousting leadership. Just this week billionaire Daniel Loeb accused Sony’s management of being “bloated.” He has spent the last several months pushing for the company to separate its struggling electronics unit from the entertainment division. Bold moves like massive layoffs and restructurings are often part of the master plan. Legendary billionaire investor Kirk Kerkorian became known as “the smiling cobra” for his fierce tactics.
Another hallmark of billionaire activists is to be vocal about their complaints. Last week, uber-rich investor David Einhorn said, “In 2006 we compared Microsoft to A-Rod, which was a compliment at the time. In 2013, the comparison is still apt, but it is no longer a compliment.” Earlier this year billionaire Jeff Gundlach sent shares of Chipotle tumbling when he said there was no such thing as a gourmet burrito.
The goal of activist investors is straightforward: get share prices climbing and then cash out with a hefty profit. A classic example involves Ackman. Back in 2006, he bought a 5.4% stake in Wendy’s. Soon after, he pressured the burger chain into spinning off its Tim Hortons doughnuts division. Two months later he sold almost all his shares at a 67% profit. Other investors, however, were left holding little more than the bag. In the two years after Ackman exited Wendy’s the stock dropped 80%.
Another billionaire, Carl Icahn is often blamed for the demise of iconic airline TWA. Back in 1985, Icahn bought 20% of the company. Three years later he took the company private, pocketing close to $469 million in the deal, but leaving the airline $540 million in debt. By 1992, TWA filed for bankruptcy.
So, which billionaires are most feared? And what are some of the companies they are currently trying to control? In the video above, Yahoo! Finance Senior Columnist Mike Santoli tells Hot Stock Minute host Lauren Lyster about three billionaires who stand out in particular.
1.) Carl Icahn: Call him the grandaddy of fear-inducing billionaires. Santoli labels him “one of the more aggressive, abrasive characters out there.” Currently Icahn is challenging a plan to take computer company Dell private again. He recently took to Twitter, blasting founder and CEO Michael Dell in a posting that read, “All would be swell at Dell if Michael and the board bid farewell.” Icahn’s efforts to derail the Dell deal seem to be working. Twice the company has been forced to delay a vote on Mr. Dell’s proposal as investors weigh Icahn’s own plan. Should Icahn prevail, it’s likely that Dell will be booted from the company he built.
2.) Bill Ackman: As the head of Pershing Square Capital Management, billionaire Bill Ackman often takes a different route. He complains to regulators when he disapproves of a company’s activities. “He says, ‘get in here and figure out whether this company is legitimate or not,’” according to Santoli. In the case of supplement maker Herbalife, Santoli says Ackman “sort of had this mega-presentation and said ‘I can detail exactly how this multilevel marketing scheme is really a pyramid scheme.’” So far the biggest thing standing in Ackman’s way has been Icahn who says Herbalife is completely legit.
3.) Nelson Peltz: This billionaire keeps reaching for snack foods. First he forced Kraft to split in two and create the new company Mondelez. Now he’s shaking up Pepsi, calling for the company to spin off its Frito Lay division so it can buy Mondelez. Confusing, right? “I don’t think the logic holds up that much,” says Santoli. In fact, Peltz may simply be looking to profit and run from his own Mondelez mistake. Santoli says, ”I think he really wants an exit for that business.” Interestingly, Peltz’s history with Mondelez’s portfolio goes back even further. In 2008, he pressured Cadbury-Schweppes to separate its snack and beverage divisions. Then Kraft bought out Cadbury.
What can a company do keep activist billionaires at bay? Be bigger than they are. Santoli says, “One of the great advantages of having a huge size corporate-wise is that you can’t have one of these investors come in and buy a stake easily and then rattle the cage.”