Activist investors targeting larger companies

Jul 17, 2013
<p>Focus on mid and large caps intensifies as small caps move out of their sights</p>

Activist shareholders are setting their sights on larger companies, according to the latest report from Activist Insight, a UK-based firm that provides information on activist investment managers, campaigns and proxy fights. The proportion of investments by activists in large cap companies, those with over $10 billion in market cap, more than doubled between 2010 and June 2013, Activist Insight said today.

While large caps still account for a comparatively small portion – 5.2 percent – of activists’ total investments, mid-caps (companies with market capitalization of $2 billion to $10 billion) jumped from an 11.7 percent share of investments in 2010 to 27.1 percent in the first half of 2013. Small and micro-cap companies, with assets under $2 billion, have fallen from 83 to 60 percent of total activist investments in the same period.

Aided by a powerful stock rally, robust growth in the first quarter of this year made investments in large- and mid-cap companies profitable, generating capital appreciation of 13 percent and 10.4 percent respectively.

In the second quarter, however, large-cap companies targeted by activists returned just 2 percent and mid-caps returned 4.4 percent, reflecting concerns about slowing economic recovery in the US and jitters about more trouble in the eurozone. Returns for small-cap investments fell from 10.4 percent in the first quarter to 6.6 percent in the second quarter, but this was still the most successful sector for activists in the second quarter 

‘The general trend is that mid caps and large caps have performed better, which would validate the shift into mid caps and larger caps by activists,’ says Kerry Pogue, Activist Insight’s managing director and co-founder, who believes the shift is here to stay.

One reason for this shift is that activists have demonstrated an ability to outperform the market, he says: ‘That would in turn have led to increased fundraising as institutional investors recognize their ability to outperform the market and would enable activists to establish size-strategic stakes in larger companies, like 5 percent to 10 percent [stakes], with the much larger funds they’ve got at their disposal.’

Activists are also drawing more support as the stigma around activism has diminished. Big pension funds and other large asset managers are moving more into an engagement role and will likely be seen doing more on the corporate governance side, Pogue adds.

Activist investors appear to be concentrating on fewer companies, with many companies attracting several activists at a time. Of the 57 companies world-wide in which investors initiated public activist actions in the quarter ending in June, a little more than 10 percent had more than one activist investor involved, versus 3 percent of targeted companies in the same quarter last year. 

Activists aren’t necessarily working together when they’re involved at any one company, says Pogue, in part due to regulatory restrictions.

But, ‘by identifying a company that’s particularly undervalued and underperforming, activists are all striving toward the same goal in terms of improving shareholder value,’ he says. ‘You can at least be sure when it comes to voting [proxies], if their strategies align and one is doing more of the pushing and the other one is taking more of backseat role, that the one taking backseat has, at least in private, offered its support and the [other] activist can count on its votes.’

Activists’ most popular tactic remains trying to gain board seats, with 25 such attempts launched in the second quarter, on par with last year. Pro-dividend campaigns initiated by activists doubled from three to six from the second quarter of 2012, while demand for share buybacks also nearly doubled in the second quarter.

Another common activist strategy is to insist that a company focus on core operations, with 18 activist actions in the last quarter pushing for companies to either improve operational efficiency or sell assets that might distract from their area of expertise. 

The number of activist campaigns initiated during the third quarter is expected to drop off significantly from the second quarter, in line with last year and the fact that proxy season is over, the review says.

While the third quarter is typically more quiet in public, given the 60 ongoing campaigns initiated in 2013, where activists have gained seats on boards, there may be further developments as activists use this to press companies for change behind the scenes. These changes may be reflected in stock prices as well.

For example, as a result of an agreement with Hess Corp, Elliott Management gained three seats on the oil company’s board, averting a proxy contest. Elliott Management has pressured Hess to sell off parts of its business and its presence on Hess’s board appears to have resulted in the hiring of Goldman Sachs to help sell the company’s gas station assets, Activist Insight points out.

Similarly, the settling of a proxy battle between Starboard and Tessera Technologies in late May seems to have been a factor in a 14.5 percent rise in the stock price between then and July 2.

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