The New Activists: No Picket Lines, But Improved Shareholder Value
You won’t find activist hedge fund managers agitating for improved
environmental conditions. Instead, this breed of investor agitates for just one
thing: improving the stock price of corporations.
At their core, good activist investors are great stock pickers. They identify
stocks they anticipate will rise in value on their own, but instead of waiting
for that share price hike, they take matters into their own hands. First, unlike
institutional investors or mutual fund managers, activists will buy large
minority stakes in a corporation, typically between 5% and 15% of the company.
Then they do everything they can to make sure their investment’s stock price
is on an upward trajectory. In many cases that means collaborating privately
with the chief executive and company’s board to find mutually acceptable actions
that will improve the share price. Hundred’s of activists quietly engage in this
strategy behind the scenes every day. If private negotiations do not get results
(read: share price improvement) activists will step up their efforts and take
their campaign public.
The goal of public campaigns can be to have company directors put the
corporation on the auction block or perhaps seeing that the CEO takes steps to
auction a division. Pressing to have the company sold is a classic activist
endeavor because the buyer typically offers a substantial premium to what the
stock had been trading at prior to the announcement of a deal. When a sale of
the business at the price sought by the activist is achieved, this result is
called a catalyst– a positive final event.
Though public perception of activists has them always pressing for
mega-deals, just as many of them can be found blocking mergers they consider
illogical or destructive to long-term shareholder value. For a number of
activists, proper investor oversight can achieve a steady improvement in the
share price and no catalyst is required.
If a majority of otherwise passive investors backs the activist’s campaign it
becomes harder or impossible for management to ignore. In some cases, the
activist will take their agitation campaign up a notch by nominating director
candidates to the board of the company. These insurgents typically argue that
their nominees, often large shareholders, will provide a better check on the CEO
than management-backed director candidates. Some activists seek to elect
nominees they believe understand the operations of the business or the financial
deal-making world better than the directors they seek to replace.
In some cases, activists seek out divestitures. A group of activists have
been publicly prodding armored car transport company Brinks
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positive results. Its stock has more than doubled to over $50 a share over the
course of their public agitation campaign, but the activists aren’t ready to
leave things alone yet. Greedy? At least one of the insurgents’ reports that,
based on its “sum of the parts” analysis of the company, it should be worth as
much as $81 a share.
In many situations, activists, like those investing in Brinks, identify
companies that they believe hold too many disparate businesses under one roof
with limited strategic connections. Having too many different units makes it
difficult for outside observers to accurately value each subdivision. In such
circumstances, an activist can easily come along, analyze each division and
decide that the company is worth more to shareholders divided and sold into
separate units, rather than kept together as a whole. Under pressure, Brinks in
2006 already sold one division for $1.1 billion.
As a group, activists have, for the past decade or so, inhabited the U.S. and
almost nowhere else, with the exception of a few insurgents dabbling in Europe.
Only recently has the strategy exploded in size and number — about 100
activists collectively direct about $150 billion in assets, and many insurgents
oversee billions in capital. In the 1990s, the vast majority of activists could
best be described as small-time gadfly investors that would agitate for change
at companies with significantly less than $100 million market capitalizations.
Today, these same managers and many others have significantly more funds behind
them and they target small, medium and large companies. Many managers are now
affecting change at large beasts, such as Home Depot
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Amro
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They also have transformed in another way: expanding their base of operations
outside North America in search of undervalued companies and geographically
diverse portfolios. Inevitably, many have reached out all over Europe, Russia
and Asia, where CEOs and corporate secretaries have little or no experience
dealing with dissident investors.
Activist investors will make it their mission to prod those executives into
share improvement actions, though their interests and the time frame for a
return on investments can diverge quite drastically. Some are short-term
extortion artists that will extract stock buybacks or special dividends from
management, leaving company coffers empty and long-term institutional investors
high and dry. As described earlier, some activists are governance investors who
seek to improve share value gradually, by seeking out operational improvements.
They also look to align distorted executive compensation packages or make sure
corporate directors have sufficient incentive to improve both profits and
share-value. These governance activists are in it for the long haul and they
often have the tacit or public support of the institutional investor base (many
institutions actually allocate their capital with these activists, as is the
case with California Public Employees’ Retirement System and insurgent,
Relational Investors).
Retail investors hoping to learn from or follow the share-price enhancing
tactics of activist investors must be careful to differentiate between the
short-term extortionists and long-term governance investors. I’ve included here
five steps to consider before deciding to buy shares and follow in the footsteps
of activist investors.
Step One: Go to the Securities and Exchange Commission’s website (www.sec.gov)
and find its EDGAR database. Corporations and some investors are required to
make regulatory filings, periodically reporting financial details about business
operations, or in the case if insurgent investors, their expectations and plans
to improve the share value of a company. Activist investors that own more than
5% of the stock market capitalization of a corporation must report their
ownership in a form called the Schedule 13D. Search for the most recent Schedule
13D’s and amended
Schedule 13D/A’s here.
Step Two: Once you have found an activist Schedule 13D filing, scroll down to
“NAME OF REPORTING PERSONS” to find out who the activist hedge fund manager is
doing launching the campaign. After that, scroll down to a section of the form
titled Item 4. There activists are required to summarize all their intentions.
For example, one activist might describe who he plans to nominate to the board
and why. Often the paragraph explanation in Item 4 is summary of a letter
included at the bottom of the filing that the activist investor sends to the
board or CEO explicitly explaining details and concerns.
Step Three: After reading the intentions of the activist, the next step is to
consider whether he or she has succeeded in past endeavors to improve share
value. Learning about how previous campaigns worked out can help you decide
whether to invest.
Step Four: Look for other activist Schedule 13D filers or activist
sympathizers in the stock. Knowing that there are a number of activists
investing in the same company usually mean there is a better chance the stock
will improve, but sometimes a whole boat load of activists will not produce the
desired outcome. That was the case at BKF Capital Group
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where activists backed by many other insurgents successfully gained control of
the board. Unfortunately, once that happened, key BKF managers left and with
them went most of the fund’s investors, leading to a drastic drop in the stock
price.
Step Five: Figure out how long you can hold the stock. Some activists take
two or more years to achieve their intended results while others seek to
accomplish their goals in a much shorter period of time through deals, special
dividends or stock buy backs. Knowing the general goals and time considerations
that a particular activist might have can help retail investors figure out how
long they should hold their stakes.
To identify key 13D filers quicker, it might be recommended to buy a program,
such as 10K Wizard, that helps you navigate SEC filings more quickly and have
13D’s emailed to you as soon as they are available.
One final recommendation: Many private investors jump on board immediately
after activist funds take their insurgency campaigns public. Free riders, as
many activists call the cadre of investors that buy into the stock after them,
often cash out a few days later, leaving a small spike followed by a dip in the
stock price in their wake. Private investors would be better advised to follow
the lead of long-term governance investors. Share improvement may take these
activists a long time to achieve, with some bumps along the way, but the results
are typically better and enduring. Happy Hunting!
Ron Orol is a Washington-based senior writer for The Deal and author of
Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.
Visit Ron’s Blog.