Activism Grows Crowded as the Rewards Remain Rich

They include Carl Icahn’s onetime right-hand man Keith Meister of New York–based Corvex Management; former Pershing Square Capital Management partner Richard T. McGuire III of San Francisco–based Marcato Capital Management; Jeffrey Smith of New York–based Starboard Value, one of the busiest activists these days; and Donald Drapkin of New York–based Casablanca Capital.

And several of the big activist hedge fund firms have swelled in size in recent years. Nelson Peltz’s New York–based Trian Partners has been on a fundraising spree, raising its assets to more than $7 billion from $3.7 billion at the end of the first quarter of 2012.

Jeffrey Ubben’s San Francisco–based ValueAct Capital has now topped $12 billion, more than double the $5.2 billion it managed three years ago.

There are growing signs that it could be getting harder to identify the types of stocks ripe for change or financial engineering that are typically targeted by activists. We saw signs of this frustration building in May at the Ira Sohn conference when Greenlight Capital’s David Einhorn lamented that his presentation on Oil States International had been scooped a week earlier when Barry Rosenstein’s Jana Partners filed a 13D on the energy services company.

Sure enough, in its year-end letter distributed to investors last week, Jana explained that part of the reason the fund did not perform as well as it would have liked was because of the “target-rich environment for activism,” noting that it passed on some activist situations that were on its radar screen either because management took actions to drive returns or other activists beat Jana to the opportunity.

This partly explains why it seems as if it’s increasingly common to find more than one high-profile activist independently agitating for change in the same stock.

These besieged stocks include Darden Restaurants (Barington Capital Group, Starboard Value), Sotheby’s (Third Point, Marcato Capital Management, Trian Partners), Juniper Networks (Jana Partners, Elliott Management Corp.), Oil States International (Jana, Greenlight Capital), Hertz (Corvex, Third Point) and Airbus (Jana, the Children’s Investment Master Fund).

“We have seen this happen before,” an executive at a prominent activist firm says, adding that it’s not so unusual to see more than one activist in the same stock.

So far, most activists are not suffering. Last year Trian rose about 40 percent, ValueAct 29.5 percent, Third Point 25 percent and a number of others about 20 percent, give or take a percent or two.

And many of them, such as Jana, Third Point and Greenlight, don’t exclusively engage in activist investing. They are will also go short, buy stocks for other than activist reasons and even wander away from the equities markets altogether.

Even so, activists still see good potential activist targets.

In its third-quarter letter, dated October 30, Trian told clients it continues to identify “compelling new investments” that have the potential to grow into core positions. “As of this writing, we have a substantial number of new ideas that are in various stages of the diligence/white paper process,” the activist firm added. “It is also worth noting that we tend to focus on large-cap situations where the competition from other activists is substantially less intense than the small- and mid-cap space.”

In its year-end letter, Jana told clients that it continues to find new attractive “value + catalyst opportunities,” adding, “Managements, boards and institutional shareholders are increasingly responsive to shareholder engagement.”

Indeed, you can see this in the growing number of companies willing to settle with hedge funds by agreeing to place one or two of their director candidates on the board. Many others are paying the modern version of greenmail — capitulating to the bullies by agreeing to use their cash to pay a fat, onetime dividend and/or buy back shares. Of course, all shareholders get this payoff, unlike with greenmail, but the rewards can be rich.

The most recent example: auction house Sotheby’s, which Wednesday said it would pay a $300 million special dividend to shareholders and repurchase $150 million in stock, including $25 million this year.

That wasn’t good enough for Marcato, which fired off a press release calling on Sotheby’s to return a total of $1 billion of capital to shareholders within 12 months.