Activist investors casting wider nets, targeting CEO change
With activist hedge fund Starboard Value’s announcing last week its intention to replace all nine members of Yahoo’s board, the stakes have become even higher for the growing list of companies trying to fend off shareholder activists. Last week, Activist Insight released some noteworthy findings from its recent review of the S&P 500, starting with the fact that more than one-third of the companies in the S&P 500 Index (183) have been approached with a public demand from an activist since 2010. Over that same period, 102 S&P 500 firms have changed CEOs while an activist has held a position in their stock.
Although Activist Insight hasn’t undertaken an in-depth analysis looking at the tenure of each of those 102 CEOs, figuring eight years as the average tenure, one would expect to see 62 or 63 CEOs move on during that six-year period, says Josh Black, editor of the UK-based publication.
‘The fact that the number, with activists in there, is so much higher suggests that these companies are under more intense pressure than the average company in the S&P 500’ to refresh senior management, Black says. ‘While I don’t think that every single instance was directly related to an activist calling for their head, it’s indicative of the fact that expectations are very high and underperforming companies are more likely to dispense with their CEO.’
In addition, if an activist has been very critical of management over the past several years, it forces the board to justify its continued support for the CEO, which boards sometimes find impossible. DuPont is an apt example. ‘The board put an enormous amount of faith in [former CEO Ellen] Kullman throughout the proxy contest [waged last year by Trian Fund Management], but once it was over and she didn’t turn around the ship, she went, and all kinds of changes followed that,’ he says. Index and pension funds are having more meetings with companies to pose questions about underperformance and ‘probably the increasing rate of shareholder activism is emboldening them to be a little bit more direct in the conversations they’re having with board members. So I can see more CEOs going as a result of those conversations and meetings.’
Nasdaq’s second annual Activist Landscape report, released in February, shows big jumps in activist campaigns in particular industries. There was an 84 percent spike in campaigns targeting industrials year over year through the third quarter of 2015, while financial, technology, and healthcare stocks all saw increases of roughly 52 percent in the same period. This shows that activists are broadening their scope overall, according to Nasdaq.
‘While the consumer cyclical sector was the clear focus in 2014, we are seeing campaigns heavily launched in six out of the ten S&P sub-sectors YTD in 2015,’ the report says. ‘This is an important development considering our data shows Activists will attempt to speak with as many in a given sector as possible to have a clear understanding of industry dynamics and opportunity.’ Black thinks the increased targeting of tech firms and financials is credible, noting that 15 percent of new campaigns this year have been in technology, while interest in banks, insurance firms and Real Estate Investment Trusts (REITs) seems pretty strong.
Nasdaq also notes increased use of proxy solicitation firms by activists trying to better gauge shareholder sentiment before launching a costly campaign against a company. Black thinks it’s possible activists are now hiring proxy solicitors much earlier in the process. ‘I know that for years they’ve had their legal teams do a review of the [prospective target’s] governance and a general overview of the shareholder base to work out how likely a campaign is to succeed,’ he says.
As for Yahoo, Black believes most shareholders would like to see a transaction [either a sale or spinoff of the tech company’s core business have been considered] before the annual meeting. ‘So I’m not sure [the alternative slate of directors] will even go to a vote unless Yahoo fails to fully market itself,’ he says. ‘It seems a less extreme situation than Darden, where the company had done a number of things from a corporate governance point of view that really irritated shareholders, and I think that contributed to all 12 directors being replaced.’
In contrast, many of Yahoo’s shareholders have stuck with the stock because of its stake in Alibaba, which still allows for ‘quite a significant change in the board membership,’ Black says.