Imagine you are the CEO of multinational food, snack and beverage corporation PepsiCo. You receive a call from an investor who has accumulated more than $1.3 billion dollars of shares in your company almost overnight. They are demanding you acquire another company and then split PepsiCo into two entities. You have two options: comply with their demands or risk being replaced.
This may seem like a bold move, or something out of a movie, but it’s the kind of thing that is happening a lot more often these days… And no company is safe.
Even technology giant Apple is not immune. Apple has had activist investors who were successful in pushing for share buybacks. “I think it is safe to say no company is immune due to its size,” said David Rosewater, Head of the Activism Defence practice at investment firm Morgan Stanley.
Santos last week found itself in a similar situation as its share price hit 11 year lows, and private equity group Scepter (backed by the Brunei and Middle East oil rich royal families) emerged making an offer.
If you’re like of the majority of individuals who own shares, you can vote at an AGM, but you don’t really have a say in how the company is run. Even though shareholders provide capital and technically own the underlying company, you have no influence over how that capital is used. Instead you trust management will make the right decisions for the future of the company.
Yet if you looked into the list of biggest corporate failures throughout history, mismanagement can be singled out as the common cause.
This is where shareholder activists come out to play.
Their game is simple: they purchase a large number of shares in an underperforming company and pressure management to do things they believe will not only benefit the company, but also push up the share price so they can sell them at a profit.
In the Santos example – having rejected the takeover offer, Peter Coates (Santos Chairman) is now looking at ways to reduce debt.
The past few years have seen a dramatic rise in shareholder activism across Europe and the US. In particular, one of the most well-known activist investors, Carl Icahn, has sent ripples through Wall Street with his activist tactics and support from some big players. His opinion is that “there are lots of good CEOs in this country, but the management in many companies leaves a lot to be desired.”
Like most activist investors, Icahn targets companies whose directors have lacked the ability to use the company’s assets to generate adequate profit.
In August 2013, when he tweeted that he acquired a large stake in Apple Inc. because he believed the company was “extremely undervalued”. Apple’s share price jumped nearly 9 USD in less than 3 minutes.
Tobias Carlisle an activist investor of Eyquem Investment Management LLC adds “As a portfolio, deeply undervalued companies with the conditions in place for activism offer asymmetric, market-beating returns.” He goes on to say that Activists exploit undervalued companies by taking a large minority stake. They then agitate for change. “A well-publicised board fight and takeover offer highlight the mismanagement and underexploited intrinsic value, and induce either a voluntary restructuring or takeover by a bigger player in the same industry.”
A weak share price compared to peers or the broader market is usually the low-hanging fruit activists use to identify that there is a problem.
Underperformance also weakens the current management team and gives the activist’s proposals a more friendly audience.
When we get market conditions like the current levels of volatility, activists pounce. They usually have a value in mind for a company and believe that they have a solution to unlock that value.
Research shows that activist investment strategies create shareholder value (at least in the short term) and improve corporate governance by resolving conflicts of interest between shareholders, directors and management.
However, shareholder activism can also be a bad thing. Most investors are out to make a quick buck, with 68% maintaining their holdings for 12 months or less. This often forces management to see quick payoffs at the expense of long-term prosperity and viability. It also discourages the market-creating (and job-creating) innovations our economy so urgently needs.
‘Deep Value: Why Activist Investors and Other contrarians Battle for Control of Losing Corporations’ by Tobias Carlisle.
