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Shareholder Activism 2014 American Style


CLIVE MINCHOM   INIn general institutional investors in the shares of large companies in the United States tend to hold their shares with a quiet voice, often supporting many companies for years, including in good times and bad times, and with effective access to sources of both internal and external financial analysis of their prospects to build their portfolios.

Since, in recent decades, such institutions hold the vast majority of a country’s investment savings, the quiet approach to a specific shareholding can break down when things go badly wrong at a particular company. Effective Shareholder democracy, then, implies that somebody actually does something about it to effectuate corporate change.

In the past corporate takeover artists, such as GE’s Jack Welch, or individual corporate raiders would jump in to perform the service, much one could say as leeches on the skin of a deceased victim of an infection might have been used in the Middle Ages before the advent of modern medicine.

Today’s carefully constructed legal concoctions known as “poison pills” however, and other such euphemistically named “shareholder rights” plans have blunted the threat of corporate takeover in America significantly, leaving weak managements potentially more entrenched than ever in their corporate cocoons.

Thus was born the activist hedge fund investor, or rather re-born. Taking pot shots at companies that need to change with relatively small investments, such investors have managed to shed their previous image when they were called nasty “green-mailers”.

Moreover, they have done so for the most part on the cheap, only needing relatively modest percentage positions to provide a platform to perform a massive public relations exercise. Even the goal of the exercise sounds benign too, and something completely modern and progressive – namely shaking up those sleepy companies that are underperforming.

They propose doing so frequently by demanding the target of their wrath throw off excess cash, spin off divisions, merge with other entities to get rid of redundant costs. Or, even by throwing out existing management and boards altogether, nominating their own slates instead in order to start again.

It all starts with how you name something as well. Terrorism is bad because terrorists kill people. Freedom fighting, in contrast, is good because the cause is just though freedom fighters still kill people. Closer to home “speculation” is a bad form of investing because it sounds like gambling, which of course it is. A “hedged” investment however must be good because it sounds like it is putting a fence around risk, which was its original term of use. However today’s “hedge funds” do nothing of the sort and most are in the business indeed of speculating, sometimes on pretty much anything they choose. Thus “activist” is now good too, whereas the predecessor term “raider” was bad. The raider just sounded like a pirate in it for himself whereas an “activist” must be a warm and friendly save the earth kind of person in it for the general good.

In the current business upswing corporate America in 2014 is now sitting on a huge hoard, some 3½ trillion dollars, of cash. This could be a prelude to a massive M&A boom, or lead instead to bigger give-backs to corporate shareholders. Activist investors such as Carl Icahn, Nelson Peltz, Daniel Loeb and Paul Singer are now doing their thing all over the continent, and even further afield, looking for lame company boards, just as a pride of lions looks for the weaker buffalos on the Serengeti plains of Africa.

Operating in parallel are the enormous, publicly listed, alternative asset management firms like Carlyle, KKR and Blackstone who still do conventional mega LBO type deals, buying ailing companies up cheap during recession, fixing them up and hoping to cash in at the next boom with a string of IPOs – as indeed we have been seeing for several months lately.

After swallowing some doubts, the big pension funds and other institutional shareholders of America seem happy to join forces with the activist investor approach to imposing change, whereas in the past it could have taken a full-blown corporate takeover. Accordingly, a well-planned proxy battle can bring a company down today at very modest cost to the raiding entity if it gains enough support along the way.

Overall this is undoubtedly a good thing as it redresses the previous imbalance that had grown between sometimes complacent corporate managements and their nominal owners, their shareholders. Now everyone can be held to account. Of course such activists do not always have the right arguments, and do not win every battle. Luckily for the activist investor when companies can fend them off by delivering superior financial performance anyway doing their own thing, which is certainly the most effective way to shut the activist investor up, then his shares will still go up and he is rewarded therefore both ways.

Even though such activism has started to spread abroad, with Daniel Loeb taking on Sony in Japan and Paul Singer mixing it up a little in German capital markets with Celesio, for the most part it still remains a uniquely American phenomenon. Other countries still prefer to deal with their corporate walking wounded in the back-rooms of the clubs of their élites whenever they can.

 

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