Over the last two years, shareholder activism has been on the rise. This is not unexpected as the market has delivered strong gains. On average, activists are good for current shareholders as their involvement usually leads to a higher share price. Often when a stock under-performs a broader market rally, activists look for ways to pressure management to make changes that they believe will drive the stock price higher. While specific data on activity levels is not available, we see more instances of activist involvement in news headlines.
Activists typically take an equity stake in a corporation to put public pressure on its management. Recently, activism has centered on looking to increase shareholder value through changes in corporate policy, financing structure, cost cutting, etc. Activists can hold a comparatively small stake in a company and still launch a successful campaign. Shareholder activism can take several forms, including: proxy battles, publicity campaigns and negotiations with management.
The well-known companies in which activists have taken positions over the past few years include JCPenney, Chesapeake Energy, Hess Corporation, Transocean, Yahoo!, Apple, Dow Chemical, Sotheby’s, Pepsico and eBay.
Among the most common tools activists believe corporations can use to increase their share price are buying back stock (most common when a company holds significant amounts of cash) and spinning off a business whose value the activist believes is not fully reflected in the current share price. When signs the business has been mismanaged are present, activists can push for representation on the company’s board or even try and get top management replaced. If these efforts are successful, meaningful change can result.
As discussed in this post from last September, we often think of share repurchase activity as a form of financial engineering. Value is a key element of the repurchase decision. We are in favor of companies repurchasing undervalued shares, but we are against seeing companies repurchase shares simply because they have excess cash or borrowing capacity. Simply put, we look for corporate management to be responsible stewards of a firm’s capital.
When evaluating equities for inclusion in client portfolios, we focus on identifying businesses that are undervalued regardless of any type of activist intervention. At times, equities we own may be the beneficiary of activist involvement, but we remain dedicated to our fundamental, bottom-up approach to evaluating individual securities and make decisions based on the value of the business in its current form.