The Lowwdown On Activist Investing

You’ve probably seen growing numbers of headlines about activist investors and strategies in the financial media, but what do you know about this trend? Let’s take a look at what activist investing involves along with some examples of famous activist investors and themes you can follow.

What are activist strategies?

In most cases, activist strategies involve purchasing large quantities of a company’s stock, gaining access to its board of directors and influencing significant changes to business and operational strategies with the end goal of boosting shareholder value.

Because you need quite a bit of capital to take on activist positions, most activist investors are hedge funds, private equity firms or very wealthy individuals.

A telltale sign when activist investors have selected a new target company is when they file Form 13D with the SEC. This filing is required when an investor purchases a 5 percent or larger stake in a company’s shares.

These days, it’s not just troubled companies that are attracting activist investors. Big, profitable companies are also becoming targets. The activist billionaire investor Carl Icahn had prodded Apple Inc AAPL CEO Tim Cook to return more of the company’s big stockpile of cash to investors when he was a shareholder. Apple obliged with share buybacks and higher dividends, helping Icahn make $2 billion in profits when he sold his Apple shares earlier this year.

Has investor activism returned value to shareholders?

If you share the same convictions as activist investors about their target companies, you just might be able to benefit from favorable performance in those stocks if their activist influence can turn a stock around.

The Week identified 71 activist campaigns against companies worth at least $5 billion dating back to 2009, when activism ramped up in a big way, and found that activism “often improves a company’s operational results — and nearly as often doesn’t.” Slightly more than half the companies examined had better shareholder returns than their competitors following activist demands, besting them by less than 5 percentage points.

Investor activism trends

Various factors are driving the rise in the activist investor. The slowing global economic growth has motivated fund managers to squeeze more out of their positions, the past successes of shareholders in ushering change at target companies, along with broader shifts among institutional investors to band together. This includes slowing global economic growth, more capital low interest rates that makes borrowing cheap, unprecedented in modern history. Interest rates have never been this low for this long.

The U.S. market was the busiest region for activist investing in 2015, with the percentage of resolved activist demands at least partially satisfied rising from 65.6 percent to 68.6 percent according to Activist Insight. More than half of activist actions last year were focused on gaining seats on company boards, removing incumbent board members and separating Chairman and CEO roles.

Activist investor campaign trends over the years. Source: Activist Insight via the Wall Street Journal

Sixty-two companies in the S&P500 Index were publicly subjected to activist demands last year, with 79 percent of activist investors targeting only one company. The remainder was broken down as follows, 17 percent had two to five targets, 3 percent had six to ten targets and 1 percent had 11 or more targets.

Here’s a recap of the largest activist investments from 2015:

• $6.62 billion invested in Apple by Carl Icahn
• $5.59 billion invested in Mondelez International by Pershing Square Capital Management
• $4.33 billion invested in Valeant Pharmaceuticals by Pershing Square Capital Management
• $3.33 billion invested in Microsoft by ValueAct Capital Partners
• $3.11 billion invested in Air Products and Chemicals by Pershing Square Capital Management

Activist investing continues to grow in 2016. Last year, 405 companies had been subject to activist demands by the mid-year point compared to 473 in the first half of this year. The approximate value of global activist investments as of June 30, 2016 was also over $266 billion according to Activist Insight.

Which sectors are activist investors targeting? Here’s the 2016 half-year breakdown: 

Stocks to watch

If you’re interested in following the activist investing market, here are a few companies that may interest you.

Chico’s FAS, Inc CHS. Activist hedge fund Barington Capital Group L.P. owns 1.5 percent of Chico’s shares and was pushing to gain two seats on the board. However, just days ago, Barington announced it was withdrawing its nominees and expects the company to deliver on its promises. Barington plans to continue monitoring the company’s performance and continues to push for shareholders to vote against executive compensation in the upcoming annual meeting.
Dell Inc. DELL announced in October it had plans to acquire EMC Corporation EMC for $67 billion. In June, Dell agreed to sell its software unit to the private equity arm of Eilliot Management and Francisco Partners Management LLC as a means to streamline the company in advance of the merger.
Yesterday, EMC shareholders quickly voted to approve the merger during a special shareholders meeting. Ninety-eight percent of votes were in favor of the deal, which accounted for 74 percent of the outstanding shares. The value of the deal has fallen from $67 billion in October to about $62 billion and would represent the largest technology merger to date. The only thing standing in the way of the merger is regulatory approval from China. The new company, Dell Technologies, would surpass Hewlett Packard Enterprise Co HPE in the market of hardware suppliers for cloud computing.
Stada. German drug maker Stada’s long-time CEO, Harmut Retzlass, recently stepped down due to “a serious, long-term illness” in early June. His replacement, Matthias Wiedenfels, has been with the company for 23 years. The company has been under pressure to reshuffle its supervisory board and add international healthcare expertise at the firm by activist investor Active Ownership Capital.
Two weeks after Retzlass stepped down, Guy Wyser-Pratte bought a 3 percent stake in Stada. Active Ownership Capital’s stake is roughly 5 percent with an additional 2 percent in options. The proxy contest is expected to take place near the end of August.

Famous activist investors

Let’s look at what Icahn and other well-known activist investors have done.

Carl Icahn at the ripe old age of 80 has amassed a net worth of nearly $17 billion. Self-made and founder of Icahn Capital Management, he isn’t afraid to get involved with corporations and shake things up. Besides Apple, companies Icahn has taken activist positions in include Chesapeake Energy, Time Warner, RJR Nabisco, Blockbuster, Yahoo!, Xerox and American International Group.
Earlier this year, Icahn announced his purchase of a large stake in Allergan plc Ordinary Shares AGN. Icahn, who bet against Bill Ackman on Herbalife in early 2013, announced on July 15th that due to the FTC settlement, Herbalife is increasing his ownership ceiling from 25 to 35 percent. Icahn owns more than 18 percent of the company already and has made at least $457 million according to Fortune. Those are welcome gains for Icahn since in the last year his publicly traded investment vehicle, Icahn Enterprises [IEP], was down 45 percent.

Icahn Enterprises [IEP] 5-year chart.

Bill Ackman is founder and CEO of hedge fund Pershing Square Capital Management, L.P. Some of his activist positions have included Target Corporation TGT, JC Penney Company Inc (JCP) and Canadian Pacific Railway Limited CP. His funds have suffered double-digit losses in the last year – a net loss of 16.5 and 20.5 percent respectively for his main fund and Pershing Square Holdings in 2015 – largely due to a sizeable stake in Valeant Pharmaceuticals.
Ackman has also been in the news recently regarding his December 2012 bet against Herbalife Ltd. HLF, a nutrition and weight management company that was facing pyramid scheme allegations up until recently. Ackman’s activist goal over the last several years has been to expose Herbalife as a get-rich-quick scammer. He believes the company should be taken down due to its use of inflated pricing, misleading data and unscrupulous incentive structure.
The Federal Trade Commission just released its ruling on July 15th for a $200 million settlement fine that doesn’t include pyramid scheme charges. Fortune estimates Ackman has lost at least $500 million on his 20.2 million shares, stock loan fees and marketing campaigns costs to publicly shame the company.

Herbalife 5-year performance. Source: Motif Investing

Daniel Loeb is a self-made billionaire with a net worth of roughly $2.6 billion. He is the founder and CEO of the $17 billion New York-based activist hedge fund Third Point LLC. Loeb’s main fund was down about 1 percent last year. One of his recent victories took place in February when Andre Liveris, CEO of Dow Chemical [DOW] announced his resignation following the company’s $130 billion merger with Dupont. Loeb was known for disliking Liveris’ leadership.
Eddie Lampert is the founder of ESL Investments Inc. and CEO of Sears Holdings Corp SHLD, a role he took on in 2013. Lampert has been involved with Sears for over a decade and helped merge Kmart and Sears Roebuck in 2005. Unfortunately, revenues have largely been declining since 2006. Lampert has been busy as CEO, spinning off many of the company’s assets including Lands’ End and Sears Hometown.

Sears Holdings Corp 5-year chart

In July 2015 he helped Sears Holding sell 235 stores for $2.7 billion, which moved into a publicly traded REIT, Seritage Growth Properties SRG. Sears Holding continues to struggle and its future could be in peril. Lampert is seriously evaluating selling its iconic KCD brands, Kenmore, Craftsman and Die Hard, which have long made the company a destination retailer and could finally expunge what little loyalty consumers have to its stores.

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