Activist Investors Stand Up

Shareholder activism is rising, even outside the US. Given recent market-shaking failures, more such assertiveness is welcome.

Where were Nelson Peltz and Daniel Loeb when we really needed them? Both veteran activist investors were busy in California earlier this year, Peltz tangling with the Walt Disney Company, Loeb joining a swarm around business-software power Salesforce. They and other gadflies missed the corporate dysfunction of the year (so far), germinating close by at Silicon Valley Bank (SVB).

No activist raised objections at SVB or New York-based Signature Bank, which collapsed a few days later, threatening a systemic financial sector crisis. Instead, investors woke up after the fact with class-action lawsuits. Their recovery chances from the now-defunct entities look uncertain.

Credit Suisse, whose downfall was as protracted as SVB’s and Signature’s were sudden, drew only one public activist campaign during its long slide to oblivion. Swiss hedge fund manager Rudolf Bohli called for the Zurich-based giant to be broken up in 2017. Management shooed him away with one of its many promises of revival. Larger investors in the US and the Middle East declined to back him up.

Six years later, Credit Suisse has been gobbled by its ancient rival UBS at a knock-down price, with substantial assistance from Swiss authorities. Stock and bond investors once again poured in with after-the-fact legal action.

None of this should make managers and board members elsewhere feel safe. Banks may be too structurally complex for activist investors, or anyone else, to get their heads around. But activists are on the march elsewhere. From Salesforce in Silicon Valley to Bayer in Germany and Japanese elevator manufacturer Fujitec, companies previously considered untouchable face dissatisfied shareholders demanding change. “I never had so much work this time of year in my life,” says Kai Liekefett, co-chair of the shareholder activism and corporate defense practice at law firm Sidley Austin. “The amount of activism is enormous.”

Statistics bear him out. Activist campaigns jumped to 36% globally to 235 last year, which was the busiest year out of the past four, according to investment bank Lazard’s Review of Shareholder Activism 2022 report.

That’s not all that boards and C-suites need to worry about. Activists are becoming more diverse. Leading activist hedge funds, like Peltz’s Trian Fund Management and Loeb’s Third Point, accounted for just 6% of campaigns last year, according to Lazard. The share of first-time activists rose to 36%. “Any shareholder can be a potential activist in today’s environment,” says Joshua Black, editor-in-chief at industry tracker Diligent.

Activist aims vary widely. The swarm of funds with positions in Salesforce are pushing for personnel cuts and a curtailed appetite for takeovers. Investors at Bayer, led by US veteran Inclusive Capital Partners and London-based Bluebell Capital Partners, reportedly want to separate its consumer pharmaceuticals and crop science businesses. The issue at Fujitec is a founding family’s continued dominance. Any perceived weakness can be an entry point. That may include the threat of a run on deposits in the future.

Governments, investors and the broader society increasingly accept that activists can help underperforming companies, even in corporatist Asia. “Historically speaking, activists have been seen as racketeers in Japan,” says Hidekazu Ishida, an adviser to Global Financial City Tokyo (FinCity.Tokyo), a group that promotes Tokyo as a financial hub. “Now the public is more accepting.”

France’s government, after some persuasion, made way for Bluebell and other activists to replace the chief executive at national-treasure food producer Danone two years ago. “We reached out to the government and said, ‘If this company is better operated, it can have better earnings,” says Giuseppe Bivona, a Bluebell partner and co-CIO.

The US Securities and Exchange Commission handed activists a potentially potent new tool last year by implementing the so-called universal proxy. This allows shareholders voting by proxy to vote for corporate directors individually, rather than choosing between slates presented by management or challengers. That should make it easier for activists to single out one or two directors they would like to replace. “This encourages activists to run proxy fights even if they have a mediocre case,” attorney Liekefett says.

The good news, from the targets’ point of view, is that activist campaigns these days are shifting toward dialogue and away from the classic model where “corporate raider” meets poison pill. Soaring interest rates and the threat of global recession may have depressed stocks and left more companies vulnerable. They’ve also blunted activists’ ultimate weapons: hostile takeovers and leveraged buyouts. The former needs an acquirer whose own stock price is buoyant and shareholders are in a mood to expand. The latter requires leverage, which is more expensive than it has been in 40 years.

Managements and boards, for their part, are growing less inclined to circle the wagons and more open to engaging with shareholders who become activists. “A strict defense that completely ignores shareholders’ concerns is an antiquated approach,” says Richard Thomas, Lazard’s head of European shareholder advisory. “Management teams try to find areas of alignment.”

What hasn’t changed is a perennial debate over whether activists add value to their targets. Lazard’s 2022 survey shows an initial stock bump: Most companies’ shares outperformed their markets for the first three months after a campaign hit the news. By six months, just half of them did. A coin toss.

Longer-term scrutiny is no more conclusive, says Charles Elson, founder of the University of Delaware’s Weinberg Center for Corporate Governance. “There are a lot of studies out there, none particularly noteworthy,” he says. “A board should listen to an activist, but that doesn’t mean they’re right.”

What’s inarguable is that boards and top managers need to prepare for that conversation, whoever and wherever they are. If Salesforce, an innovation icon whose shares have more than quadrupled over 10 years to a market cap of $187.4 billion, can draw an activist swarm, almost anyone can. “The change in investors’ priorities from growth to profitability has opened megatech targets that would have been unthinkable before,” Black says. Be prepared.

According to Lazard, the US remains the global shareholder-activism pacesetter, with 135 campaigns launched last year, a 41% jump on 2021. Europe’s total rose by 20% to 60, more than a third of those in the UK. Europe was notable, even more than the US, for the big-name companies that came under fire. US-based Loeb increased his holdings in Shell, demanding the oil supermajor spin off its liquefied natural gas, renewables and marketing divisions. German investor Enkraft Capital pushed its compatriot, multinational energy company RWE, to divest coal assets. Peltz, lately in the US headlines for his tangles with Disney, also attacked UK-based consumer giant Unilever. The American raider attained a board seat; Unilever CEO Alan Jope announced his retirement four months later.

Longtime Salesforce chief executive Marc Benioff’s job looks secure for now. Maybe because he has made sweeping concessions to the five activist funds that have (publicly) piled into his company, including Third Point and Paul Singer’s Elliott Capital. Benioff announced a 10% personnel cut in January. He also disbanded his board’s M&A committee, responding to criticism of his past hyper-acquisitiveness, and earmarked $20 billion for share buybacks.

Dissident shareholders are speaking up at other US tech giants like Alphabet (Google’s parent company) and Meta (formerly Facebook). “Like many other companies in a zero-rate world,” Boston-based serial activist Altimeter Capital wrote last October, “Meta has drifted into the land of excess—too many people, too many ideas, too little urgency.” The next month, Chris Hohn, billionaire boss of TCI Capital Management, urged Alphabet to take “aggressive action” on cutting headcount and costs.

Japanese activist Katsunori Tanaka and his firm Ariake Capital are gently shaking up a different kind of establishment, regional banks. As a group, these institutions’ shares are trading at 2013 levels. “These banks prospered in the 1970s and 1980s,” FinCity.Tokyo’s Ishida says. “Now activists are helping management adjust to the new reality.” One step forward: Hokkoku Bank, where Ariake owns shares, switched its payments system in 2021 to Microsoft’s Azure cloud, breaking a taboo against trusting vital operations to foreign hands.

The one activist brigade not currently on the offensive is the environmental, social and governance (ESG) crusaders, whose so-called single-issue campaigns hope to influence major corporations on a range of issues. This movement scored a breakthrough in 2021, when a previously unknown US fund called Engine No. 1 parleyed a 0.02% stake in oil colossus ExxonMobil into three board seats and commitments to carbon reduction. Lazard calculates that would-be do-gooders have struggled for traction since driving just 4% of campaigns last yer. “Support for ESG activism has dropped quite significantly,” Black says.

Activism at banks has been another relative dead spot. Financial institutions provided just 11% of activist targets last year, close to a four-year average, Lazard reported. For the record, SVB was red-flagged two years ago by Florida-based HoldCo Asset Management.

HoldCo held shares in a wealth manager called Boston Private Financial Holdings (BPFH), which SVB was acquiring, mostly for stock. It argued that holdings in a bubbling tech stocks unrealistically inflated SVB’s share price and that “a reversion in SVB’s valuation to recent normalized levels would be disastrous for BPFH shareholders.” Nobody listened then. They may pay more attention next time.

The tech sector’s share of activism, by contrast, jumped last year to 21% from an average of 14% in the previous four years. No big surprise there, given the distress in share prices. Other statistics of note: Activists are hunting for ever-bigger game. Fully 18% of global 2022 targets boasted market capitalization above $25 billion, up from 10% in the last activist boom year, 2018.

Both trends speak to long-term consolidation among shareholders, and to those shareholders’ willingness to challenge managements, says Gregory Rice, co-lead of Shareholder Advisory and Activism at Boston Consulting Group (BCG). Institutional investors own 70% of US stocks today. The three biggest index fund asset managers—BlackRock, Vanguard and State Street—control nearly a quarter of the US market. (All three backed Engine No. 1 in its ExxonMobil campaign.) If they, along with a few major pension funds, lend their ears, a novice activist can quickly evolve from a minor pest to a force to be reckoned with. “With 10 or 12 phone calls you can reach half the votes in an S&P 500 company,” Rice says. “Many institutions with a white shoe reputation are willing now to drive change behind the scenes.”

If activist campaigns are getting easier to organize, achieving their aims isn’t necessarily so. After years of cost-bingeing on optimistic growth projections, big US targets have readily acquiesced to demands for cost cuts. Disney responded to Peltz in February by announcing 7,000 layoffs and a reorganization that would purportedly save $5.5 billion. In return, the veteran agitator dropped plans for a proxy fight. Since last November, Meta CEO Mark Zuckerberg has unveiled 21,000, labeling 2023 the social network’s “year of efficiency.” Alphabet promised to slash headcount by 12,000.

Actual strategic change is tougher to push through. Activists in Europe and Asia grapple with founding families reluctant to relinquish control. Last autumn, Bluebell’s Bivona lost his bid to place a board member at Richemont, the Swiss-domiciled owner of Cartier and other luxury brands. Founder and chairman Johann Rupert controls 50% of votes, despite owning just 9.1% of the firm’s equity. Bivona says he is not discouraged. “We are still entering the golden age of activism in Europe,” he declares. “There is so much low-hanging fruit with dysfunctional conglomerates and family capitalism hanging on.”

The campaign at Japan’s Fujitec is making more headway. Hong Kong-based activist Oasis Management replaced most of the company’s outside directors at an extraordinary shareholder meeting in February. It promised to “relieve Fujitec from Uchiyama Family control,” though former CEO Takakazu Uchiyama hangs on as non-executive chairman.

Oasis is gearing up for more battles with Japan Inc. “I hear they are hiring like crazy,” FinCity’s Ishida says.

The most common activist goal across geographies remains to sell the target company, or parts of it. M&A campaigns accounted for 41% of 2022 totals, according to Lazard. The runner-up was board representation at 30%. Dealmaking is constrained by the same weak markets that stimulate activism in the first place, though. Global M&A plunged 37% by value last year, though remaining above pre-pandemic levels, according to consultant PwC (also known as PricewaterhouseCoopers). “You would think that M&A-related activism would be related to M&A activity,” Lazard’s Thomas says. “We’ve seen an increase in breakup arguments, even as M&A was declining.”

An ultimate example of how challenging breakups can be is Bayer, whose $63 billion acquisition of US chemicals rival Monsanto in 2018 is widely considered an epic blunder. A series of activists have been after the company to redivide ever since, so far without results. The latest to pile in, Jeff Ubben of high-profile US fund Inclusive Capital Partners, has reportedly switched focus—from divestitures to replacing the CEO who engineered the Monsanto deal.

Most tangled of all is the question of whether activists do their fellow shareholders any good. Not always, even when they achieve their goals. Disney shares, which had fallen 44% in 2022, plummeted by 14% in a month after the board gave way to Peltz on layoffs and cost cuts. British pharmaceuticals giant GSK (formerly GlaxoSmithKline) is down 17% since June 2021, when activists succeeded in hiving off consumer products from the core business. An exchange-traded fund of pharma stocks is about even over that time. Both stocks ran up as the activist campaigns climaxed, indicating markets were buying the restructuring rumor then selling the fact.

Results like these prove activists are “financial tricksters who are very effective at misleading the public,” asserts Jeffrey Sonnenfeld, a Yale School of Management professor and longtime activist scourge.

The University of Delaware’s Elson takes a more measured view. Peltz ironically scored a big success after losing a proxy fight at US chemical giant Dupont de Nemours in 2015. “Peltz lost, but the company did what he wanted,” Elson relates: Ousting the CEO and pushing through a merger with Dow Chemical. Dupont’s shares rose by half over the following three years, though they have hit some bumps since then.

For Diligent’s Black, activists are much like other active fund managers: lagging when markets are hot, showing their mettle when they cool. “Activists had a good run before 2016, then markets started going straight up,” he says. “Now we see value investing is not dead after all.”

More important than what industry observers think is what corporate boards and top managers think, and they are shifting toward an open mind on activists’ demands. “Often, both management and the investor will understand the problem,” BCG’s Rice says. “The discussion is more about the timeline and how to fix it.”

Not that this discussion can’t be difficult. “Many companies underappreciate timing considerations when shareholders get frustrated,” Lazard’s Thomas says. “They think they might have years, when they actually have months.”

Still, most campaigns are settled “out of court” before either side goes public, let alone takes formal action, Black says. “We only see a handful of proxy fights a year,” he says. The best way to avoid one, and the other headaches of an activist campaign, is to keep your company’s stock price up.