Activist investors toast a banner year

By Dan McCrum and David Gelles

Is any company safe from the agitators? Even Institutional Shareholder Services, an influential adviser on corporate governance matters, which is often an ally of activist investors, now has one of them in its own shareholder register.

ValueAct Capital, an activist hedge fund, last month disclosed a 5 per cent stake in MSCI, which owns ISS.

The move was only one element in a late flurry of activism that caps a year in which activists have ousted boards, forced corporate break-ups and challenged sleepy management teams.

Though the number of 13D filings, which announce when activists have acquired more than 5 per cent of a stock, is down from previous years, boards of directors and bankers still see 2012 as a banner year for activism. Many activists succeeded in pressing companies to return cash or do a deal, and some of the biggest brand names in the US, including Netflix and Procter & Gamble, came under siege.

And with several activist funds producing investor returns of more than 20 per cent for the year, cash has flooded into the sector. “More money means a need to find more targets, and larger ones,” says Henry Gosebruch, managing director in JPMorgan’s mergers and acquisitions team.

There was $57bn dedicated to activist strategies at the end of the third quarter, according to HFR, the research house, up from $51bn at the start of the year and $32bn at the end of 2008. The pressure on boardrooms seems likely to increase.

Chris Young, head of contested situations for Credit Suisse, says: “There is a tremendous amount of interest from executive suites about vulnerability to activism and shareholder pressure, particularly in the US but also outside the US.”

It comes as activists are setting their sights high, and looking overseas. Bill Ackman, founder of activist hedge fund Pershing Square, swept a boardroom election at railroad company Canadian Pacific and then moved on to the world’s largest consumer goods maker, P&G.

Trian, an activist company founded by Nelson Peltz, Edward Garden and Peter May, has began a low-key campaign to encourage the leadership of Danone, the French yoghurt maker, into increasing profit margins and not wasting capital on costly takeovers.

Not everything is going the activists’ way, however. While Ralph Whitworth of Relational Investors had a good year at Illinois Tool Works, he suffered in Hewlett-Packard. The investor was invited on to the board in November 2011: too late to influence the $10.3bn takeover of UK software maker Autonomy that has since proved disastrous. A person familiar with Relation said that he had experienced very long turnrounds before, including four years at Home Depot.

Meanwhile JC Penney, the department store chain, is undergoing a strategic overhaul at the urging of Mr Ackman. Sales have plunged this year, taking the share price with it, but the investor likens it to a private equity style turnround that will ultimately bear fruit.

Nonetheless, the fact that such activists are even in a position where they are welcomed on to boards reflects their change in stature and influence. A decade ago, lawsuits were the first response. “Today we get an entirely different reaction, we don’t get sued any more”, says Barry Rosenstein of Jana Partners. “Long-only investors will actually call us with suggestions.”

Some are very publicly onside, such as the Ontario Teachers’ Pension Plan, a Canadian pension fund that worked with Jana to push for a spin out of the education business from McGraw-Hill, concluded last month.

“Success begets success,” says Daniel Kerstein, head of the strategic finance group at Barclays. “The more we see activists appearing to create changes at companies and, through that, profiting for their investors, the more campaigns we’ll see. It’s self-perpetuating.”

The next wave of activist fights is already shaping up ahead of the spring “proxy season”, when many public companies hold annual meetings where activists can wage public battles for board seats.

For instance, after forcing splits at Marathon Petroleum and El Paso, a natural gas company, Jana has taken its playbook to Agrium, a Canadian fertiliser group. Agrium is resisting a split, so investors will vote on a new slate of candidates for the board proposed by Jana, one of which includes Lyle Vanclief, a former Canadian minister of agriculture.

More activist situations are being resolved without going to proxy fights. But many of those that do turn into battles are still being waged by Carl Icahn, the billionaire raider turned activist who this month lost his second attempt to gain control of Oshkosh, the defence manufacturer.

Mr Icahn says he expects to stay busy: “One problem with the economy is that way too may companies are just badly managed and too many boards do not hold management accountable”. Company directors, consider yourselves warned.

Europe’s boardrooms gently stirred, not shaken

While agitators have terrorised the boardrooms of US and Canadian companies this year there were only 18 disputes put to a shareholder vote in Europe, down more than a quarter on the year before according to ISS, the shareholder advisory firm, writes Dan McCrum.

The bulk of those do not even fit the bill of activism, they are instead brought by concerned retail investors, billionaires with mixed motives, and companies attempting creeping control.

A fight over Impreglio, in what some have called Italy’s first real proxy fight, is between the Gavio and Salini families courting a small group of minority investors.

It reflects the reality of activism in Europe. Asset managers are primarily the subsidiaries of banks and insurance companies, where the desire not to offend big corporate clients has tended to take precedence over shaking up boardrooms.

Hedge funds which have attempted to force changes, meanwhile, suffered during the financial crisis. ISS counts 15 funds that have wound down or abandoned their activism since 2008, and estimates that assets dedicated to the strategy in Europe have halved.

Even in the UK, the biggest market for activists, “there has been a clearly declining trend since the financial crisis”, says Nelson Seraci of ISS. He says that large independent money managers and a tradition of communication mean that the UK market is largely self-correcting. “In general investors are quite hands on, and they don’t like supporting hedge funds”.

The challenges of European activism can be seen in the softly softly approach taken at Danone, the French yoghurt maker, by Trian, the investment group formed by Nelson Peltz, Ed Garden and Peter May.

When the group announced last month that it had taken a 1 per cent stake in Danone, its prescriptions were surprisingly mild: a small dose of belt tightening and cut out indulgent acquisitions with shareholder money.

Indeed, Trian is instead acting more like an advocate than an activist, championing what it says is a cheap stock and asking for a nod from the company that it agrees and won’t spoil the pitch. Boardrooms are gently stirred, not shaken.