Although activist investing seems a bit out of control, underneath it all there is some good to be found.
It seems like things have gotten out of control with activist investing. It has become a favorite topic of the media and it seems the activist investors are getting more and more outlandish.
Wall Street activism really starting heating up after the CNBC throwdown between Bill Ackman of Pershing Square Capital and Carl Icahn last year. It was an entertaining half-hour of insults and bickering, part of a bigger battle the two have waged against each other over whether Herbalife (NYSE: HLF) is a pyramid scheme.
Later last year, in an email, Third Point founder Dan Loeb said he was waging a “holy jihad”on Sotheby’s (NYSE: BID). Then, this year, Third Point decided to take on the $57 billion market cap chemical company, Dow Chemical (NYSE: DOW). Last month, Third Point put up a website and posted a three-minute video that was a political campaign-style attack ad against the Dow CEO. It has since taken down the site and the video.
Activist investors are here to stay. Activists launched nearly 250 campaigns last year, double from just 10 years ago.
And they are going after bigger and bigger companies.
Jeff Ubben of ValueAct Capital got a board seat at Microsoft Corp (NASDAQ: MSFT) and was instrumental in getting Steve Ballmer ousted as CEO. Microsoft, by the way, is a $390 billion market cap tech giant that is larger than the combined values of the NBA, NFL, NHL and MLB.
Icahn met with Apple (NASDAQ: AAPL) CEO Tim Cook to persuade him to return more cash to shareholders. Cook eventually conceded. Apple, with a $660 billion market cap, is larger than the entire Russian stock market.
But things seemed to peak last week.
In a letter to the TheStreet (NASDAQ: TST), the relatively small hedge fund, Callen Capital, took TV personality Jim Cramer to task. The activist investor owns 9% of the financial news site.
Callen chastised Cramer over his excessive compensation at TheStreet (which Cramer founded in 1996) and conflicts of interest with his appearances on CNBC. But it didn’t stop there. Callen called out Cramer for his non-pecuniary compensation, including “perfumed sedan driver(s) and assorted assistants who spray ionized lavender water on your [Cramer’s] barren cranium.”
The debate over whether there’s anything salvageable at TheStreet is for another time. For what it’s worth, TheStreet did trade at $70 a share over a decade ago, but now trades less than $3 a share. And it still has a loyal following of over 40,000 customers paying several hundred dollars a year for its newsletters — and maybe some go there because Jim Cramer is there.
Nonetheless, Callen’s letter was amusing and many investors got a good laugh. However, many missed the bigger point that sometimes there are conflicts of interest, lazy management and excessive pay that needs to be brought to light.
I’d argue there are a lot of misunderstandings with activists being portrayed as corporate raiders (a very ‘80s term) and being called short-term investors. Investors don’t appear to take issue with the size or types of companies that activists target. Rather, it’s the way they go about it.
Most activist investors don’t publicly call companies out and aren’t having open spats with CEOs.
If you can look past the shenanigans, there are some activist investors out there that are trying to work with management and companies to unlock shareholder value.
For example, there’s Trian Partners’ Nelson Peltz. He’s a quiet activist who prefers to work behind closed doors and not in the media spotlight.
He’s also a trailblazer. His recent endeavor includes trying to shake up the banking community. He’s an activist investor at Bank of New York Mellon (NYSE: BK) and recently got a seat on the board of directors. He may push to break up the bank. This is a big deal that doesn’t get a lot of press because it doesn’t have name calling or bombastic email exchanges.
And the truth remains that many companies could use activist help, including McDonald’s (NYSE: MCD).
If any good has come from activist investing, it’s the rise of investor confidence. Normally a good thing, in this case it is leading activists to invest outside of their core areas of expertise.
Icahn has taken on companies across all areas of the market, from Netflix (NASDAQ: NFLX) to Clorox (NYSE: CLX). Sometimes it works for him, sometimes it doesn’t. He’s also ventured into the energy space, where he’s lost a lot of money of late.
Two of his largest oil-related holdings, Chesapeake Energy (NYSE: CHK) and Transocean (NYSE: RIG), are down 50% and 30%, respectively, over the last three months.
Warren Buffett’s right-hand man, Charlie Munger, has talked a lot about knowing the edge of your own competency. There are a few activist investors that do this well.
Marcato Capital founder Mick McGuire cut his teeth at Ackman’s Pershing Square Capital working with real estate. Therefore, you should listen when he says that there’s value in the likes of Dillard’s (NYSE: DDS) and Life Time Fitness (NYSE: LTM). He thinks shareholder value would be unlocked if these companies would create a real estate investment trust (REIT) for their owned real estate.
Then there’s the Blue Harbour Group founder, who has a background in private equity. He’s an activist investor in companies that might be attractive to private equity buyers, like Rackspace Holdings (NYSE: RAX) and Akamai Technologies (NASDAQ: AKAM).
The Red Mountain activist hedge fund also has a private equity background. It runs its small fund like a private equity fund, focusing on solid business models that need growth capital or business expertise. Some of their core investments are Destination XL Group (NASDAQ: DXLG) and Nature’s Sunshine Products (NASDAQ: NATR).
There is money to be made in activist investing if you know where to look. Therein lies the rub.
Investors who want to play along with activist investors have few options. One of them is the 13D Activist mutual fund. But its top three holdings are Howard Hughes (NYSE: HHC), Canadian Pacific (NYSE: CP) and Cracker Barrel (NASDAQ: CRBL).None of its holdings focus on the smaller activist investors, plus their holdings are from older activist campaigns.
Many smaller funds just don’t get much coverage because they take on smaller companies, but that doesn’t make what they are doing less significant to shareholders. Clinton Group, which is an investor in Nutrisystem (NASDAQ: NTRI), and Engaged Capital, active at Jamba Juice owner Jamba (NASDAQ: JMBA), are just a couple examples.
Many investors love to hate the bombastic activists. In some cases those activists bring it on themselves — after all, there’s no such thing as bad publicity.
But management teams are humans, meaning they get lazy, complacent even. In some cases, retail investors could use some help in restoring focus at an otherwise great company—and that’s where activists play a vital role in the public markets.
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