It’s easy to get the idea these days that activist investors can’t lose. Hedge funds that press for corporate change were the best-performing category in the industry last month. Aggressive hedge fund managers these days are confidently striding up to venerable old companies to demand exactly what they want – and, often enough, they’re getting it.
And a new pressure group has popped up trying to counter popular forms of activist pressure that aim for quick tactics to goose share prices. The consortium of big companies and asset managers and others is called Focusing Capital on the Long Term and is holding a conference Tuesday in New York.
Monday’s agreement by General Motors Corp. (GM) to start a $5 billion stock buyback and earmark future excess free cash flow growth for distribution to investors was a quick and clear win for the fund manager Harry Wilson. He asked for the moves and got them after he threatened to run for a board seat.
“They rolled Barra,” CNBC host Jim Cramer said after the deal was announced, referring to the investor group’s imposition of its will on CEO Mary Barra, who had initially resisted the buyback idea.
GM shares popped higher by nearly 3% on the news, feeding the idea that a vocal and pugnacious investor can essentially turn aggression and publicity directly into investment gains. Investors tend to think of these activists as predators with an advantage, able to spur moves such as stock buybacks, spinoffs or asset sales to goose share prices rather than simply waiting and hoping for the market to recognize value hidden within companies.
Professional arm twisters Carl Icahn, Bill Ackman, Nelson Peltz and Dan Loeb have scored big wins in recent years, and hedge funds that specialize in corporate activism have been among the most successful fundraisers in the industry.
They’ve muscled around such companies as Dow Chemical Co. (DOW), Family Dollar Stores Inc. (FDO), Ingersoll-Rand plc (IR) and Allergan Inc. (AGN). On Tuesday, Marcato Capital’s Mick McGuire went on TV to call for the replacement of the CEO of Bank of New York Mellon Corp. (BK), a company that dates to 1784. More than $100 billion is now stashed in funds devoted to this strategy.
No guaranteed profits
Sometimes, though, the raiders manage to break into the temple but come away without any of the riches they seek.
Even when the activists get involved, and sometimes when they get a say in strategy, there is no guarantee they’ll profit, either quickly or slowly. A few prominent stocks with heavy activist involvement have the raiders underwater.
Bob Evans Farms Inc. (BOBE)
Sandell Asset Management waged a typical public-shaming campaign against the brass at this chain of casual family restaurants last year, criticizing then-CEO Steve Davis for lavish spending on a private jet and new corporate headquarters.
The firm pressed for the sale or spinoff of a prepared-foods business – a move it portrayed as a no-brainer, claiming that ready buyers were waiting to step in.
Sandell nominees won four board seats last August. By mid-December, Davis was out as CEO. The market bid up the stock to a high of $59.64 on Tuesday from $49.10 at the time Sandell won board seats in August.
Last week, though, the company reported disappointing quarterly results and shelved any plan for divesting BEF, saying an investment bank review with an interim CEO running the company determined a quick sale did not make sense. The stock collapsed by 21% to $46.75 – below where it traded on the day of the activists’ shareholder-vote victory.
Hertz Global Holdings Inc. (HTZ)
Pioneer activist Carl Icahn took a stake last summer in the car-rental giant last fall, complaining of financial mismanagement. JANA Partners also bought into Hertz.
Icahn and JANA proposed different executives to be installed as CEO, with Icahn winning, but not before Hertz disclosed accounting problems that forced it to restate multiple years’ worth of results. The stock took another leg down, and now sits around $21.75, well below where Icahn bought in the high-$20s.
Cliffs Natural Resources Inc. (CLF)
Talk about being weighed down. When Casablanca Capital took a 5% interest in this iron-ore producer in January 2014, the stock had already cratered from $100 to $19 in two-and-a-half years. The investment firm demanded that the company be broken into its domestic and international divisions.
Casablanca won a majority of board seats, but the collapse of the global commodity “supercycle” and persistent declines in world iron-ore prices have continued to ravage Cliffs’ business. Its shares now sit beneath $6, a loss of 70% since Casablanca’s stake was disclosed a bit more than 13 months ago.
A crowded strategy?
While these setbacks to activists are a small portion of all such situations, and each is tied to particular corporate conditions, the broad activist-stock category has also cooled.
The 13D Activist mutual fund (DDDAX), which selects stocks among companies with big activist holders, has underperformed the Standard & Poor’s 500 index by a bit more than one percentage point over the last twelve months, though still has trounced the index by 4.6 percentage points a year for the past three years.
A somewhat similar ETF, the Direxion iBillionaire Index ETF (IBLN) has similarly lagged the market since it was first listed last August.
It’s too early to call the peak in the activist trend given still-generous debt markets and shareholder sentiment favoring quick financial fixes. Yet there are signs the market for ripe targets is getting thin and easy upside from quick financial maneuvers forced from the outside is less assured.