The rise of activist investing

Jan 7, 2014 23:33 UTC

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

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:

The most hyped startup of 2013 is incredibly boring – Sam Biddle

Long Reads
What the Greyhound bus at 100 means to America – Gary Belsky

EU Mess
Surprise disinflation in Europe has the ECB worried about possible deflation – Reuters

Primary Sources
Supporting documents for deferred prosecution agreement: U.S. V. JPMorgan Chase Bank, N.A. – DOJ

The Fed
Just how divided is the Fed these days? – Tim Duy

Puerto Rico is experiencing a historic exodus as its residents flee its economy – WSJ

These 5 allegedly crazy and Communist ideas are neither silly, nor Soviet – Josh Barro
Five conservative reforms millennials should be fighting for – Dylan Matthews

The Internet
The first celebrity to jump into cryptocurrency is Joe Weisenthal – Business Insider

Big Brother Inc.
How Ireland became with world’s data privacy protector – Leo Mirani

Getting married makes female economists poorer and male economists richer – Lydia DePillis

Does upward mobility have adverse effects on health? –  NYT Opinionator

“Balls interfere with brains”, or, don’t short Treasuries because someone on TV said you should – Noah Smith

Good news and bad news about global inequality – John Cassidy

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.

Penney costs Ackman $700 million

Ben Walsh
Aug 13, 2013 22:36 UTC

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

Two years into his JC Penney investment, hedge fund manager Bill Ackman has lost $700 million and abruptly resigned from his seat on the company’s board of directors. The company’s stock is down 45% in the last year. Today’s surprise announcement that he would step down from the Penney board comes after he called for the removal of the company’s interim CEO and chairman, only to be rebuffed by other board members and fellow shareholder George Soros. Ackman is also dealing with a souring short position in Herbalife, whose shares have risen over 100% so far this year.

Losing hundreds of millions of dollars publicly isn’t something you can easily forget, but competitors to Ackman’s Pershing Square fund seem to be enjoying his slip ups. Dan Loeb used the uber-insider medium of the Bloomberg terminal to presumably needle Ackman (twice). If that weren’t enough for Ackman, Carl Icahn and Soros have been on the opposite end of his bet against Herbalife. Sapna Maheshwari and Mariah Summers write that “Ackman seems to be coming unglued”. Gina Chon thinks it has suddenly “become cool to trash Ackman” because he is losing such vast amounts of money.

Ackman, who intentionally courts media scrutiny, might be abrasive, but he doesn’t lose too often. Justin Fox believes Ackman is doing the market’s work in pushing beleaguered companies like JC Penney to turn themselves around.

There may still be a path to profitability for Ackman’s short in Herbalife. William Alden and Andrew Ross Sorkin report new details that could lead to regulatory action. In 2011, fine shards of metal were found in the company’s shake mix as it was coming of the production line. A week after production resumed, Herbalife’s SVP for global quality said that if the plant were inspected by the FDA “in the next month, they’re fucked… I don’t know how else to put it”. Herbalife maintains that no tainted products made it all the way to consumers.

The newly-reported internal documents may explain why Ackman took his so-far losing position in Herbalife: the employee who obtained them first approached the FDA, then Ackman. Ackman is now paying the employee’s legal bills. Herbalife, however, dropped just 2.5% today. It is still up more than 75% since Ackman announced via a 300-page presentation that it would fall to zero. — Ben Walsh

On to today’s links:

How much should Detroit be paying for bankruptcy consultants? – Detroit News

The Fed
Janet Yellen’s views on banking policy changed after the financial crisis – WSJ
“Summers has demonstrated essentially zero crisis-prevention skills” – Felix

Stories of the reverberating subprime mortgage crisis – Peter Eavis

The town of Whiteclay, Nebraska, sells 1000 cans of beer per resident per day – Tim Murphy

Primary Sources
Introducing the Hyperloop – Elon Musk
“Elon Musk’s Hyperloop is a political manifesto, not just a tech trick” – Kevin Roose

New Normal
“The Bloomberg years have been very good ones for people who can afford to live in Park Slope” – George Packer
The press, and their sources, need to use encrypted communication – Poynter

“In my rare coffees and phone calls with Milton Friedman…” – Brad DeLong

Billionaire Whimsy
“Skilled craftsmen in Normandy” made a $13,300 copper bathtub for NYC’s Mayor – AFP

“Experts: Tree drips with bug excrement, not God’s tears” – WPTV
Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.