Over the past year, Nelson Peltz, head of asset management firm Trian Partners, has staged one of the largest proxy fights ever against a public company, consumer products giant Procter & Gamble. Big dollars were at stake in this boardroom brawl. The total cost of the fight is estimated to have exceeded $60 million so far.
Activist investing can take many forms. In P&G’s case, Peltz suggested boosting shareholder value by cutting costs and reinvesting the proceeds in promising new and existing products. In other cases, activist investors have suggested M&A activity, improved corporate governance or outright sale. While Trian efforts at this point appear to have failed, such campaigns are gaining steam. Data provider FactSet estimates that the number of activist campaigns launched in the U.S. annually has increased 18% since 2012.
The reasons behind the increase aren’t hard to fathom. Extracting excess returns by putting pressure on management can look appealing in an environment where more and more money is chasing fewer and fewer opportunities. It is not clear, however, that activist campaigns, in aggregate, leave investors better off. FactSet studied 175 such campaigns launched between 2012 and 2016. In cases where the activist efforts were successful, the shares of target companies experienced a median one year loss of 0.7%. Alternatively, in cases where the activist effort failed, the shares of target companies had a median one year gain of 9%. The results were more pronounced over two years with the shares of failed campaigns producing a median gain of 10.9% and successful campaigns, a median loss of 2.4%.
There are several possible reasons for this somewhat contrary outcome. First, target companies are often experiencing problems that are not solved easily or quickly. Simply wining a proxy fight does not guarantee a rebound in earnings. Second, the shares of target companies often gain ground during a proxy fight. Further gains after an activist wins can be harder to come by. Finally, companies that successfully repel activist investors are under tremendous pressure to improve results. In many cases, surviving management brings in new talent with new ideas and accelerates implementation of existing initiatives.
Whether activists are good for investors or the economy at large is a much more difficult question to answer. In an environment where shareholder rights are often easily ignored, activist efforts can keep management accountable to the true owners of the business. But many argue that their presence has also contributed to the general decline of public share ownership. Take a look at the chart above. Since reaching a peak of 9,113 in 1997, the number of U.S. listed shares has declined 37%. And firms today are larger and older. Two decades ago, the average firm was 12 years old. The average firm today is 18 years old and worth four times as much.
Entrepreneurs looking to raise capital point to several drawbacks of public ownership including the increased cost and the tendancy to focus on quarter to quarter profits or “short termism.” Activist investors’ general aim to boost returns quickly contributes to this problem. Finally, the growing availability of more “patient” capital from private equity investors means young companies have more choices today. The end result is that the stock market is composed of fewer but larger companies. The implications of this both on shareholders and business formation generally should be carefully considered.
