Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
It appears that we are (still) in the golden age of the activist investor. Alexandra Stevenson reports that “it’s no longer an insult to be called an activist investor”. In fact, it’s en vogue. In 2013, there were 10 instances of an activist investor pushing a company to “break itself up or sell or exit businesses”, compared to just three in 2009, according to the WSJ.
2009 was the year that Ken Squire predicted activism was about to flourish. He wrote that in the post-crisis environment, “not only is shareholder activism likely to increase significantly, but the economic and political climate will make it much easier for activist investors to succeed”. Back then, it was about activists coming in to take advantage of market inefficiencies. But last August, Nelson Peltz pinned the rise in activism on efficient markets:
You know what term you don’t hear anymore? Arbitrage. The markets have gotten too efficient. Instead of trying to figure out what’s going to happen, we’re buying stock, and our goal is to get that company to do something that’s in the best interest of shareholders.
Meanwhile, Citi’s Peter Orszag says that assets under management at activist funds have grown by 50% in the past year, compared to 15% for other types of funds — possibly because, on the surface, activism works. Further, according to a Citi report he flags, activist funds have earned an annual return after fees of about 20% on average, compared to 8% for all hedge funds and 13% for the stock market since 2009. Orszag points to a study by Alon Brava, Wei Jiangc, and Hyunseob Kim, which finds that intervention by activist investors at manufacturing companies resulted in increased productivity, but a decrease in hours worked and stagnant wages. In other words, activism was good for the company but bad for the workers.
That doesn’t mean that companies, or their management teams, are eager for Carl Icahn to come knocking. Last year, when David Einhorn was poking around Apple trying to get it to return cash to investors, corporate lawyer Martin Lipton wrote that “academics’ self-selected stock market statistics are meaningless in evaluating the effects of short-termism”. Lipton said, without going into detail, that for decades he’s been advising corporations that have seen “the detrimental effects of pressure for short-term performance”.
Matt Levine argues these anti-activist arguments are self-serving, coming from the people who get paid to represent the management teams threatened by activist investors. Nevertheless, to fend off the activists, the banks seem to be advising clients to start doing what activists might want them to do — before the activists even show up. In the end, Levine says, “that seems like another positive result of shareholder activism”. — Shane Ferro
On to today’s links: