Activist shareholders are back for good reason
Activist shareholders are back — and for good reason. As the proxy season heats up, pot-stirrers like Carl Icahn and Ron Burkle are raising a fuss at companies from biotech Genzyme to bookseller Barnes & Nobl. Easy pickings from the credit bubble bursting may be gone. But the activists remain a formidable bunch.
Calpers says its portfolio of funds that challenge underperforming companies has generated an average return of 7.2 percent a year since it started in 1999, compared to an annualized 1 percent loss for the S&P 500 index over the same period. By all rights, the activists’ returns should be competed away. Copying the tried-and-true approach shouldn’t be difficult to replicate. Buy a slug of a laggard with a pristine balance sheet and demand the company sell itself.
But it’s harder than it sounds. Bigger institutional investors aren’t typically interested in how every company is run. They hold so many stakes it’s easier just to sell than invest the necessary resources to challenge poor management.
Smaller funds, meanwhile, can find the barriers to entry imposing. A good reputation makes chief executives and other investors more apt to listen. But a track record takes time to build. Campaigns are expensive, with upfront research and stock buying costs, and specialized experience necessary for complex areas such as biotech. What’s more, some multi-year battles yield zip.
The fights have gotten tougher too. Returns in the relevant Calpers basket were negative over the most recent three-year period. Poorly run companies — the sort targeted by gadflies — suffer worst in a downturn. Typical wheezes also haven’t worked. When borrowing was easy, dissidents could persuade management teams to give cash back to shareholders or sell underperforming units to private equity bidders.
Some of these ploys went badly wrong. Target’s ill-timed share buyback, encouraged by William Ackman’s fund, wound up hurting both the retailer and the activist as the price plummeted and the plan was halted to preserve cash.
A recovery for these specialized investors still looks likely. There are plenty of mismanaged companies that remain unchallenged. And with limited competition, the long-run returns for experienced activists should again beat the broader market. Slumbering boards beware.