Why Shareholder Activism Is Here to Stay

Activists gaining seats, flocking to certain sectors

By Carla Norfleet Taylor and Bill Densmore

June 2016

Shareholder activism will likely persist as investors look for ways to supplement returns, despite reports of a recent slowdown in institutional funds flows into hedge funds. While some activist proposals fall short, activism is here to stay with the impact extending far beyond a defined campaign. Why?

One need only look at the growing number of activists gaining representation on US corporate boards. Proposals to gain board representation at non-financial U.S. corporations represented over 50% of all activist proposals in 2015, according to data from Activist Insight. Given the rising propensity for firms to settle with activists in lieu of a drawn out proxy battle, dissident shareholders have become ever present on boards giving them power to meaningfully influence corporate decision making from within.

Moreover, large hedge funds such as Trian Fund Management L.P., Pershing Square Capital Management, and Starboard Value have become synonymous with certain sectors. The consumer, retail, and technology sectors, for instance, have experienced a significant uptick in activist activity since 2010.

In fact, roughly 30% of Trian’s, Pershing’s, and Starboard’s investments have been concentrated in the consumer goods, services, or technology sectors, according to data from Activist Insight. These activists currently have investments in and in some cases board representation in firms like Mondelez International, Brink’s Co., and Yahoo! Why?

Part of the reason these sectors attract activists is because they are cash-rich and contain participants that are either slow or hesitant to adjust to shifting consumer preferences or secular change. This reticence has left the door open for activists to assert pressure on incumbent management teams by proposing restructuring constructs that boost the bottom line, improve stock performance, and potentially returns cash to shareholders.

But activist campaigns evolve slowly with many proposals never gaining traction as companies becoming more astute at dealing with them. Executives are engaging large shareholders more, actively evaluating strategic alternatives before activists step in, and hiring consultants to help them respond to overtures from dissident investors.

Efforts by Trian to split up PepsiCo, Inc. and merge with Mondelez and Starboard to consolidate the office supply market with a Staples-Office Depot combination are examples of activists’ proposals that fell short but still influenced corporate strategy and in at least one case reaped hefty returns for the shareholders.

PepsiCo reduced overhead, increased advertising investment, and delivered better earnings following the campaign by Trian who sold out of its position in PepsiCo earlier this year. Following its blocked merger, Staples announced additional cost reductions and potential strategic alternatives for its European business. PepsiCo’s stock more than doubled from the time Trian’s proposal became public in March 2013 until its exit in May 2016. Conversely, Staples’ stock price dropped 50% from December 2014 when Starboard announced its stake until when U.S. regulators blocked the Staples-Office Depot merger in May 2016.

Conclusion

Shareholder activism will continue to add uncertainty for creditors with certain sectors remaining more vulnerable than others. Dissident investors often emerge as a result of weak operating trends, serving as a catalyst for change.


Originally published at thewhyforum.com.