By N. Peter Rasmussen, Senior Legal Editor for Bloomberg Law and Annie Pavia, Legal Editor for Bloomberg Law
New data from the Bloomberg Terminal allows our Activist Investor Analytics to highlight the objectives of leading activists and the strategies used to achieve those goals. Another new graph allows users to comparatively evaluate the outcomes of campaigns waged by leading funds. Other recently updated analytics indicate that some of the largest companies in the world are on the radar screens of leading activists.
*Data used to generate this graph is from the Bloomberg Terminal as of Nov. 2, 2017, and reflects campaign strategies used by each listed activist. More than one campaign strategy can be used in a single campaign. Graph represents data from 2010-2017.
Activist investors are motivated by several different objectives and utilize widely varying strategies when they decide to target particular companies. From a tactical standpoint, some funds want to constructively engage with management to realize incremental value creation, while others want to force management’s hand through aggressive public campaigns and proxy contests. Common activist goals include increasing shareholder value, making changes to the issuer’s capital structure, cutting costs, divestitures, or returning cash to shareholders through dividends or share buybacks. On rare occasions, activists have been motivated by non-financial goals, such as socially responsible investing, divestiture from particular countries, or environmentally-focused policies.
In terms of campaign objectives, leading activists most often sought to alter the corporate structure of their targets, seeking changes to the organization of the target businesses 141 times since 2010. In 125 campaigns during the same time period, activists sought changes to company boards.
Funds rarely sought changes in target company management. This is not surprising, as activists often do not want to insert themselves directly into the day-to day business operations of the target. However, in one high-profile campaign, an activist played a major role in bringing down a chief executive. The proxy fight between Paul Singer’s Elliott Associates fund and Arconic became increasingly hostile, and the relationship between Arconic’s CEO Klaus Kleinfeld and Singer became personally antagonistic. Kleinfeld eventually resigned his position in agreement with the board.
The Arconic campaign is somewhat unusual. Initially, activists tend to engage in more constructive, rather than combative, campaigns, and specifically, Singer’s Elliott Associates fund engages in more constructive campaigns than hostile ones. In contrast, Carl Icahn’s fund, Icahn Associates Holding, waged the most hostile campaigns and sought the most board changes.
*Data used to generate this graph is from the Bloomberg Terminal as of Nov. 2, 2017. Graph represents data from 2010-2017.
This graph sets forth the results that leading activists have achieved in their campaigns over the last seven years. The results in this area are not an all-or-nothing determination, as campaigns may achieve partial success, where they have achieved some, but not all, of their stated objectives.
It is not surprising that Paul Singer and Elliott Associates, the most active fund, had the largest number of successful campaigns. Considering only campaigns that have ended, Jeffrey Ubben’s ValueAct Capital had the highest percentage of successful campaigns, winning five out of six, including Allison Transmission and Armstrong World Industries. ValueAct tends toward long-term investments aimed at gaining board representation, and the fund was the first activist fund to gain a seat on the Microsoft board.
One key campaign that is reflected as “ongoing” is the contest between Trian and Procter & Gamble, including the battle for the seat on the board of Procter & Gamble involving Nelson Peltz. As described further below, P&G announced that the incumbent director had narrowly prevailed, while a recount awarded the election to Peltz. The count is subject to a final audit. Other matters in addition to the election remain unresolved between Peltz and P&G, including Peltz’s desire to break the company into multiple operating units.
*Data used to generate graph is from the Bloomberg Terminal as of Nov. 14, 2017. Graph represents shareholder activism data from 2015-2017. Market cap measurement is from the day before the activist announcement.
Companies ranging from micro-cap (market capitalization of $300 million or less) to mid-cap (up to $10 billion) make up the overwhelming majority of targets for activist investor campaigns. This graph indicates that nearly 80 percent of the activist targets fall into these categories.
The concentration of fund activity in the micro- to mid-cap market makes sense. Smaller companies are not generally covered as closely by analysts as are their larger counterparts, and often have less rigorous corporate governance structures. A smaller investment stake is required to attract the attention of management, or to initiate a successful proxy campaign with these companies, making them more susceptible to activist initiatives. Smaller companies are also less likely to have engaged in regular reviews of their governance policies, charter and bylaws, committee charters, and compensation plans.
Although smaller companies are becoming more familiar with activist techniques, they may be less prepared to react to an activist challenge than are larger firms. Activists can also get more “bang for the buck” when approaching smaller companies, as they can obtain a larger stake and greater influence with a far smaller investment commitment. These factors present the possibility of unlocking greater shareholder value than would be possible in larger, better-known firms. These same factors may present a down side, however, when it comes time to liquidate the investment, because the smaller company stocks will likely not be trading in as robust and transparent markets as the securities of large-cap issuers.
In previous years, many large-cap companies thought that the sheer size of their market capitalization rendered them immune from activist challenges. Large activist funds have not been shy about knocking on the doors of some of the largest U.S. and global companies, however, including companies such as Microsoft, General Electric, Nestle, Dow Chemical and Procter & Gamble. Arconic, a corporation resulting from the division of Alcoa into two public companies with more than $11 billion in market capitalization, and consumer products giant Procter & Gamble, both fought high-profile and expensive campaigns with activist funds this year.
*Data used to generate graph is from the Bloomberg Terminal as of Nov. 14, 2017. Graph represents shareholder activism data from 2015-2017. Market cap measurement is from the day before the activist announcement, in billions of U.S. dollars.
This graph indicates that, although small- and mid-cap companies comprise the majority of activist campaigns, large public companies are increasingly being targeted by activist investors.
Néstle, one of Europe’s largest and most valuable companies, is currently engaged in a campaign with Third Point LLC. According to its last letter to investors, Third Point stated that it holds roughly 40 million shares of Néstle, valued at approximately $3.5 billion. The firm stated that while Néstle has “arguably the best positioned portfolio in the consumer packaged goods industry,” it has regularly underperformed U.S. and European consumer staples peers. The fund is considering shedding the company’s 23 percent stake in French cosmetics company L’Oréal S.A., worth as much as €29 billion. The death this fall of Liliane Bettencourt, daughter of L’Oréal’s founder and the holder of the largest stake in the cosmetics company, could impact that decision.
Trian, headed by Nelson Peltz, took a $3 billion stake in Procter & Gamble in early 2017, and sought a seat on the P&G board. Peltz criticized the consumer products giant for its lack of creativity and vision, and for a failure to bring new products to a market increasingly dominated by younger consumers. Peltz also saw the company as burdened by a stagnant bureaucracy, and a board made up almost exclusively of current or former corporate chief executive officers. Procter & Gamble expressed the view that Peltz was not a good fit for the company’s board.
The resulting proxy fight was likely the most expensive contest in corporate history, with the two sides spending as much as $100 million to entice voters. The contest was incredibly close, and Procter & Gamble announced at the shareholder meeting that its nomine had prevailed. An initial recount indicated, however, that Peltz prevailed by a razor-thin margin of 0.0016 percent of the votes cast. The result is subject to confirmation by an independent auditor.
Trian is also the activist with the largest stake in General Electric. Trian has been pressuring GE to focus on growing its industrial business and to boost earnings after several months of disappointing returns. Following the departure of longtime CEO Jeff Immelt earlier this year, GE named Ed Garden, founding partner and chief investment officer of Trian, to its board.