By Stephen Bornstein, Principal of Wall Street Counsel
Hedge fund activists are sitting in the catbird seat right now. They had a great 2013, winning 68% of their proxy fights (compared to 43% in 2012), raising more than $7 billion in new capital and targeting 20 companies with market values above $10 billion.
There are only 60 hedge funds in the world dedicated to activism and they now control over $90 billion of total capital. By mid-November of last year, activist funds had also outperformed the average hedge fund by 14% to 7% (while the S&P 500 was at 23%).
Activism’s elder statesman, Carl Icahn, attributes its recent success to cheap credit which he claims lends added credibility to activist campaigns that could lead to potential acquisitions. Others credit a rising stock market for distinguishing weak from strong public company performers and the gradual disappearance of staggered boards and poison pills.
Last year also saw public pension plans, university endowments and private institutions throw greater support behind activist campaigns. According to activist Nelson Peltz of Trian Partners, institutional investors now realize that the easy profits derived from arbitrage opportunities have been virtually eliminated by high-speed trading and that hedge fund activists actually step in to improve a company’s stock performance rather than just speculate on it.
Easing of Relations
Targets also showed themselves to be more open to deliberating with activists than simply dismissing them. Companies with large cash piles, underperforming stocks or lagging divisions are beginning to realize that activists do their homework and may have good ideas for rationalizing company operations and enhancing stock prices. Activists too have softened their rhetoric so as to engage with company managements rather than offend them. As a result, settlements far exceeded proxy fights for board seats in 2013.
Even companies that successfully defended against activists’ onslaughts have subsequently addressed their concerns. Apple’s stock buyback last year following David Einhorn’s failed assault on its huge cash pile is a good example.
“Good ideas usually win out over the long run,“ says activist Barry Rosenstein of Jana Partners, who last year launched five successful activist campaigns without a single proxy fight. “More and more boards are seeing the inevitable outcome and skipping the perfunctory battle.” Dan Loeb of Third Point Management says both sides now recognize that “nasty and divisive fights are just a distraction and waste of time.”
While an increasing number of public companies have opened their board rooms to activists for constructive discussions, others have taken the opposite tack. Some companies that consider themselves vulnerable to activist onslaughts are now preparing in advance by engaging in defensive simulations. In these war games, company managements and their investment bankers, attorneys and public relations firms role play mock activist attacks designed to identify the types of corporate weaknesses that activists would seize upon and develop strategies for rebuffing them. Some companies have even brought in hedge fund activists to brief top management on company vulnerabilities. Senior executives then follow up these fire drills by developing support for their strategy with the company’s largest institutional shareholders.
Whichever way public companies decide to play it, there’s no question that hedge fund activists have raised their stature in the market economy and are now considered a much more significant factor in influencing corporate behavior than the self-serving, short-sighted terrorists they were branded in the past.
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