Activists are turning out to be a shareholder’s best friend.
The often noisy investors such as Carl Icahn, Bill Ackman and Nelson Peltz -- who urge corporate heads to rethink their strategies and expedite stock-boosting changes -- generated a 48 percent average gain for shareholders of the companies they’ve preyed on in the last five calendar years, according to an analysis of 81 companies by Bloomberg News. That beat the Standard & Poor’s 500 Index, the benchmark gauge for U.S. stocks, by about 17 percentage points.
“Some people argue that the activist hedge funds benefit at the expense of the other shareholders, but that doesn’t happen,” said Wei Jiang, a Columbia Business School professor whose own study reached similar conclusions. “It’s not like they pump and dump and the rest of the shareholders suffer.”
Bloomberg News analyzed returns of U.S. targeted companies amid a wave of activist campaigns that has reignited debate about whether they are good for long-term shareholders. Last year, 369 companies were targeted, up 12 percent from the year before, according to Hedge Fund Solutions, affecting corporations as big as Microsoft Corp., PepsiCo Inc. and Apple Inc. The increase was fueled by an almost tripling of money flowing to the activist hedge funds over the past five years, to $93 billion at the end of 2013.
Activists take stakes in companies they deem undervalued and push for changes such as increasing dividends and share buybacks, cutting costs, shaking up management teams and boards or breaking up companies. In some cases they’re able to work out a truce with executives, and other times they turn to proxy fights to try to get their way.
Bloomberg News’s data looked at U.S. targets of activism since January 2009, measuring the stock price change from the day before the activist’s position was made public through Dec. 31, 2013. The companies had to have pre-activist market capitalizations of $1 billion or more.
In the six-month periods before the activists stepped in, these stocks had been trailing the S&P by about 8 percentage points on average, data compiled by Bloomberg show.
Winners for shareholders include Jana Partners LLC’s effort to break up McGraw-Hill Cos., Starboard Value LP’s activism at Office Depot Inc. and Elliott Management Corp.’s at Brocade Communications Systems Inc. Daniel Loeb’s Third Point LLC made money for investors in targets including Yahoo! Inc., while Ralph Whitworth’s Relational Investors LLC fueled stock gains at Illinois Tool Works Inc. Corvex Management LP successfully pushed for the sale of AboveNet Inc., handing investors a better gain than the broader stock market.