Wall Street | 8/06/2013 @ 8:25AM

The Golden Age Of Activist Investing

From billionaire veterans like Carl Icahn, Nelson Peltz and Paul Singer to younger hedge fund stars like Daniel Loeb, this has become a golden age for activist investors who like to take big stakes in publicly-traded companies and shake things up with merger proposals, proxy contests and recapitalization schemes.

Company CEOs like Michael Dell, venture capitalists like Ben Horowitz,  superlawyers like Martin Lipton and even movie stars like George Clooney might not like it, but personality-driven activist investing has become a rising force in American business and finance. The once derided investment strategy has become a popular, permanent and ever-present feature of U.S. business that is more frequently being used to target companies operating in a broader range of industries and exported to foreign lands by prominent American investors.

In the first six months of 2013, 14 activist campaigns were launched involving companies with market capitalizations greater than $1 billion, according to FactSet SharkRepellant. That matches the activity that took place in the first six months of 2012, a huge activist year during which 21 activist campaigns were initiated against companies with market caps of $1 billion or more. By contrast, in 2010, there were 11 such campaigns started and a decade ago in 2003 there were four. Investment capital is pouring into activist investing strategies as this genre of investing has become one of the few bright spots in the rich hedge fund industry that has seen the vast majority of its highly-compensated managers underperform the U.S. stock market and low-fee index funds in recent years. In July, the activist wave got even stronger with four prominent hedge funds launching ambitious campaigns, including Dan Loeb’s Third Point hedge fund’s investment in CF Industries and ValueAct’s move on Microsoft.

Activist investing is “up in terms of activity pretty substantially,” Mark Shafir, global head of mergers & acquisitions at Citigroup told CNBC recently.  “People are making money doing this in the work we have done relative to some of the other long/short strategies and some other strategies and so we think it’s going to continue and it’s going to become more and more part of the landscape.”

Once disparaged as greenmailers and corporate raiders who pillage for quick profit, activist investors have become rock stars and rebranded themselves as advocates of all shareholders, taking on the kind of shareholder watchdog role that institutional investors like big pension funds and mutual funds have long resisted. They are not done rebranding themselves. Peltz, whose Trian Management oversees $6.5 billion, describes his investment style not as activism but as “constructivism.” Larry Robbins, who runs $6 billion hedge fund firm Glenview Capital Management, one of the best-performing hedge funds over the last 18 months, wants to be seen as a “suggestivist.” The idea is to appear less threatening while trying to do things like replace the management and board of directors of a company, like Robbins is trying to do at hospital company Health Management Associates. “In Hollywood terms, we are more Mr. Spock than William Wallace,” Robbins recently said. “I get a lot more out of these CEOs by not embarrassing them publicly, by not being viewed as trying to nail their scalp to the wall,” Barry Rosenstein, the prominent activist investor who runs $5 billion Jana Partners, told The Wall Street Journal.

Others, however, have a different way of describing what these guys are up to. “In what can only be considered a form of extortion, activist hedge funds are preying on American corporations to create short-term increases in the market price of their stock at the expense of long-term value,” famed lawyer Martin Lipton wrote earlier this year. “The consequences of radical stockholder-centric governance and short-termism prompt a series of questions that cry out for re-examination.” Lipton, the most prominent defender of corporate boards in their battles with activist investors and the inventor of the so-called poison pill defense tactic, even suggests that the new wave of activist investors might be responsible for “a very significant part of American unemployment and a failure to achieve a GDP growth rate sufficient to pay for reasonable entitlements.”

Lipton has been blasting activist investors for decades. But last week activist investing went Hollywood as George Clooney attacked Dan Loeb, who has been criticizing the management of Sony Pictures Entertainment as part of his effort to get Sony to spin off its U.S. entertainment assets. “[Loeb] calls himself an activist investor, and I would call him a carpet bagger,” Clooney told Deadline.com. “What he’s doing is scaring studios and pushing them to make decisions from a place of fear. Why is he buying stock like crazy if he’s so down on things? He’s trying to manipulate the market.” Clooney said activist hedge fund managers like Loeb don’t create jobs, unlike the movie industry that is a significant U.S. exporter.

But while Clooney’s production company has a contract with Sony, he doesn’t own a big chunk of the company’s shares and activist investors have long argued that their ownership in companies gives them a say in how a company should be run. They also believe companies should be run with the shareholders in mind and with a corporate governance structure that his focused on creating as much shareholder value as possible. This long-held belief continues to be challenged with powerful corporate leaders like Google’s Eric Schmidt supporting the idea that companies should be run first and foremost to create and maintain customers and users. Ben Horowitz, the big Silicon Valley venture capitalist whose firm backed Facebook, Twitter and Groupon, has been more blunt, cautioning founders of companies to beware of activist shareholders.

Nevertheless, activist-investor efforts to drive shareholder value at companies seems to be all over the financial markets.  The renaissance is best typified by billionaire investor Carl Icahn, who is going stronger than ever. With more money at his disposal than ever before, Icahn, now 77, has been a huge player in financial markets in recent months. He has vigorously taken on Michael Dell’s effort to take Dell private, played a role in kicking Aubrey McClendon out of Chesapeake Energy, and is at the center of the billionaire brawl over Herbalife. He has enjoyed rich recent successes from companies ranging from CVR Energy to Netflix. His Icahn Enterprises has seen its stock rise by 57% this year. Icahn hasn’t changed his tune in years and recently argued that “what I do is good for America.”

Wall Street used to be a place where so-called Tiger Cubs were born. These were the offspring of Julian Robertson, the legendary hedge fund manager who nurtured several traders who went on to start their own prominent hedge funds that helped grow the industry. Now, there are also Icahn-trained activists roaming the financial markets, like Keith Meister, the former Icahn lieutenant who now runs his own $2 billion Corvex Capital hedge fund and successfully got shareholders to vote out the board of CommonWealth REIT. Mark Rachesky’s MHR Fund is on a huge role and the former Icahn understudy has been teaming up with his mentor to push for changes at Navistar.  Even Icahn’s son, Brett Icahn, has joined with father’s shop and is running significant money, including masterminding Icahn’s Netflix investment.

Activist players are continuing to push the envelope and bringing their brand of investing to new industry and geographic frontiers. Dan Loeb, whose Third Point hedge fund has been one of the best-performing hedge funds over the last 18 months or so, stormed Silicon Valley, sparking sweeping changes to the flailing Internet giant Yahoo’s management and making about $1 billion in realized and paper profits. Now, he’s off to Japan, trying to shake things up at Sony in a country that has long resisted reform at many levels. Loeb is not the only brash American to attack a foreign company and sometimes these guys even manage to win broad support for their efforts in foreign countries. Not long ago, William Ackman struck at Canadian Pacific Railway and his intervention has helped spark a huge run-up in the stock. The business magazine of Canada’s authoritative Globe and Mail newspaper didn’t call him a carpet bagger, rather they branded Ackman, who is not a corporate executive, “CEO of The Year.”