Powerful and influential activist investors like Carl Icahn, Bill Ackman, Nelson Peltz, Edward Bramson, or Daniel Loeb are becoming the worst nightmare of senior executives around the world. They buy a stake of 5% or more of a company and then put the management under massive pressure to rethink business strategy and make changes that will increase shareholder value. In order to achieve their primary goal of shareholder value maximization, all means are justified. They often insist on splitting up the company, introducing cost reduction programs, repurchasing shares, paying cash dividends to shareholders, cutting management bonuses, or replacing the management all together.
Recent studies indicate that this trend, which was initially dismissed by many as an American phenomenon, is here to stay—globally and across industries. Both the number of engagements of activist investors as well as the amount of capital managed by them is increasing rapidly.
According to a survey conducted by the management consultancy Bain & Company, the number of deals rose an average of 34% a year between 2000 and 2014. The international law firm Linklaters reports that in the first three quarters of 2015 alone, there were 860 new activist engagements worldwide with Europe becoming more and more attractive to activists. Since 2010, the number of engagements in Europe has increased by 126%, according to Linklaters. Particularly affected are companies in the UK, but also in France, Austria, Switzerland, and Ireland.
Activists have also started targeting not only small, struggling companies, but increasingly larger and more profitable companies that they consider undervalued on the capital markets. Microsoft, Apple, eBay, Procter & Gamble, PepsiCo, Philips, Hochtief, the food manufacturer ConAgra Foods, and the world's largest chemical company DuPont are among the most prominent examples.
For the management of the targeted company this undesired outside influence means a loss of control. After all, who likes others to tell them what decisions to make? On the other hand: the growing number of management scandals in recent years shows that corporate management is not infallible and that the involvement of successful activist investors may actually be justified in some cases. In fact, scholarly research is yet to produce a clear answer to the question as to whether or not shareholder activism is beneficial to companies.
Critics like Martin Lipton like to point out that activist investors are only pushing the short-term profit-oriented interests of shareholders rather than the long-term strategic goals and interests of the companies and other stakeholders, such as the employees. “The proper conclusion,“ Liptain said in an interview with Blomberg News, “is that the kind of activism we’re talking about—the kinds of things that Carl Icahn and Bill Ackman do—does not lead to improvement in corporations over the long term.”
A recent large-scale study of Columbia Business School, Harvard Law School, and Duke University examining 2,000 activist engagements, however, could not confirm this theory. To the contrary, the authors found that the performance and the return on assets of companies improved in the long-term. And this trend continued after activists had left.
Another study published by Wall Street Journal at the end of last year, however, shows that shareholder activism not necessarily has a positive effect on company stock prices. Only 38% of the 71 companies investigated saw an improvement in performance compared with their competitors. With just 5%, the performance increase was marginal, though.
Activist engagements, therefore, cannot be lumped together. For some companies it can be a blessing, for others a curse.
Remains the question how companies that want to stay in charge of their own affairs can defend themselves against activist attacks. Firstly, they should do their homework. That is, they should develop a solid strategy and review it regularly. They should also make sure that the compensation packages of top executives are aligned with the company's performance. Secondly, companies should stay in close dialogue with all shareholders to reduce the risk of them blindly following the lead of activists. The corporate strategy should be communicated openly, clearly, and understandably via as many channels as possible.
In short, companies should manage the threat of shareholder activism proactively. Only in this way, they have a chance to remain control of their situation.