"The number of companies where a quick divestiture or capital allocation change will work is dwindling," said Avinash Mehrotra, Goldman's co-head of its shareholder advisory group, which advises companies on defending against activist investors. (Graphic:http://tmsnrt.rs/2eIUVwX)
Healthy Windfall
The most high-profile example this year of activism prompting a sale was the nearly $300 million profit Jana Partners made on its three-month investment in Whole Foods Market Inc.
Jana disclosed last week that it sold its entire 8.2 percent Whole Foods stake, worth $1 billion at the time and around 40 percent more than what it paid, after the organic grocer agreed to Amazon.com Inc's $13.7 billion acquisition offer.
Some activists also pile into companies already on the block, adding further pressure to seal the deal, a tactic applied in the sale of contract research firm Parexel International Corp. .
Fueling the frenzy has been a surge in overall M&A volumes during the past several years, underpinned by cheap financing and lofty valuations.
Thanks in part to M&A, the performance of the HFRI ED Activist Index in the last 12 months is up 16.46 percent, the fourth best performer among all hedge fund strategies and a major turnaround from losses suffered last year.
"Activists are pushing for strategic review because in a lot of situations, selling the company today at current valuation multiples offers a better risk-adjusted return than waiting for the current strategy to play out," said Waheed Hassan, who helps management teams defend against dissident shareholders as head of activist defense at advisory firm Alliance Advisors.
The M&A push is not without risks.
Powerful index funds such as BlackRock Inc. and the Vanguard Group, which control a growing share of the stock market, are pressuring managements and other investors to choose long-term strategies over a tempting premium from a suitor.