Disney was at the heart of one of most exciting corporate battles in 2024. They successfully defeated billionaire activist Nelson Peltz.
Disney’s shareholders have rejected Peltz’s attempt to gain two seats in the board of directors.
In November 2023 Peltz, his Trian Fund Management hedge fund and their two previous attempts to take on the entertainment titan had re-launched their assault.
They focused on Disney’s management, accusing them of not addressing poor earnings growth or a low return on investment.
Another major campaign by Elliott Management, however, unfolded in a different way.
Elliott, the largest activist fund in the world, orchestrated a shake-up of Starbucks’ leadership, which led to Brian Niccol replacing the former CEO, who previously headed Chipotle.
The change in leadership came just months after Elliott purchased a stake. Starbucks shares rose by 20 percent after the change in leadership, showing strong investor support.
Investors who are active have called not only for a change in leadership, but also for the outright sale of businesses.
Bloomberg published a report on Friday about Tencent Holdings, Ubisoft Entertainment and the founding Guillemots considering their options. This includes a possible buyout of French video game developers after they lost over half their market value in this year.
The talks are being driven by a group of activist investors, including AJ Investments. They have been pressing for a Ubisoft takeover or sale to a strategic buyer amid the recent stock market crash.
Ubisoft’s shares rose by 30 percent following this news.
Jana Partners has also pushed to sell software company Rapid7.
The rate of activism by activist investors is unprecedented.
Investor activism is on the rise
A recent Accenture study titled Navigating through Activist Investor Requests,
The activism is on the rise and it’s a major concern to both CEOs and boards.
According to the report, between 2010 and 2024 financial-oriented activists have launched 1,232 campaigns.
Since 2010, four out of ten S&P 500 companies have at least been targeted. Campaigns are growing with a CAGR of 16% from 2010 to 2023.
In the past five years an average of about 125 campaigns were launched each year.
Even well-established, large companies can be affected by activist pressure.
According to Harvard Business Review 550 US firms will face public activist demands by 2023. This represents an increase of 8% from last year, and 70% compared with a decade earlier.
Activist campaigns also have a growing international presence.
In the last two years, activists have targeted more companies in Canada than ever before, in Asia as well as in Europe.
Accenture stated that by August 2024 nearly one third (31%), of a sample 650 companies, had at least a 60% chance of being the target of activist investors.
A third of campaigns escalates to proxy war.
Source: Accenture
Investor activism: What drives it?
Investors who are active in corporate governance or leadership change tend to focus primarily on this issue.
Accenture’s study of more than 1,200 activism campaigns revealed that 68% demanded changes in governance and management.
The majority of activists’ campaigns are focused on mergers and purchases (M&A), which accounts for 24 percent.
Activism often forces companies to split up divisions and pursue sales.
Even if shareholder approval is not required, activists can influence M&A transactions to alter or oppose the terms.
The opposition against M&A deals increased in 2023.
According to Harvard Business Review, activists made 63 requests to stop M&A transactions at US-based firms, an increase of 19% compared with the previous year.
Accenture stated that activists advocated for more than just governance reforms and M&A. They also pushed for operational efficiency (7%), capital management reforms like share buybacks (7%) and strategic changes (16%).
In 2023, activists will demand remuneration from 81 US-based companies. This is a 37 percent increase over the 59 demands seen the year before, and represents the largest increase year-over year for any type of request.
Mark DesJardine is an assistant professor of Business Administration at Dartmouth College’s Tuck School of Business. He made a comment in the HBR Report.
In early 2024 I was attending a conference on shareholder activism in Manhattan when an activist mentioned that he’d come across a company which had a dentist as a director. He was then told by the CEO that his dentist liked him so much, that he appointed him as a director.
DesJardine said that activists are more likely to target companies with directors that have a poor track record, low voting support from shareholders in previous roles and have been sued.
Does activist investing create lasting value?
Although activist campaigns can lead to immediate increases in share prices, there are questions about their long-term viability.
According to Harvard Business Review, activist-led interventions typically boost the stock price by 2 to 10 percent. Some well-known activists have even pushed gains up to 20 percent just by publicly announcing that they are involved.
Accenture cautions, however, that although total shareholder return (TSR), which is typically higher in the year following an activist campaign tends to decline over time.
TSR increases by 8.9% on average in the first year of an activist campaign, but then falls in the following years. Returns often fall behind S&P 500 in the fourth year.
After an activist campaign the TSR average increases in the short-term but falls behind the S&P500 in the longer term.
Source: Accenture
McKenzie’s study on nearly 170 campaigns by activists worldwide in the last decade revealed that 40% of the companies who saw positive TSR during the activism experienced negative TSR three years after the campaign ended.
McKenzie explains that activists will sell their shares to maximize profits when the stock price of a firm is higher than its fundamentals. After all, activist investors are looking for high returns.
Even when intrinsic and market values are in alignment, a higher level of performance can’t be maintained forever. TSR decreases when earnings growth slows.
Some activist investors, however, are not interested in the long-term. They make quick fixes, but do nothing to push for lasting, fundamental changes. Not all activists are right about their decisions. In fact, in two of every five campaigns they have lost money.
Investor activism: Verdict
Managers and board members often see them as disruptive, which is apparent from the chaos that occurs when an activist investor speaks up.
Although their actions can result in a short-term increase of total shareholder return (TSR), it is often at the cost of stability.
Activism can be aggressive and lead to derailment of carefully designed strategies. It may also force changes in leadership or disrupt dynamics within boardrooms.
A proxy war or a public conflict over strategic decision can strain management.
As a result of activist campaigns, CEOs can lose control and even their job if they are not careful.
The data from the past shows, however, that activism campaigns can often stop a company’s decline, and excess returns are sustained up to three years after a campaign.
Although future volatility could challenge these results, evidence shows that activist investors, in spite of their disruptive methods can act as catalysts to create value. McKenzie says,
It’s not surprising that the first reaction of a board is to keep activists at bay. However, it would be a mistake to ignore what they have to say. They may not always be right but their insights will likely reflect what many investors are thinking. And perhaps even what company leaders have been contemplating.
It says that in most cases, the announcements of activists are correlated with value creation.
The verdict is mixed on the investor activism. Although activists may temporarily boost profits and shake up the leadership, their long-term impact is often unclear.
Even so, the role of women in corporate America as change agents and accountable leaders is unquestionable.
This article Activist Investors: Power Players or Catalysts for Long-Term Value? This post may change as new information is revealed.
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