Investor Activism: The next generation flexes its muscles


Traditionally seen as aggressive, a new wave of players is taking a different approach to getting a seat on the board

The founding class of shareholder activists, once scorned as “corporate raiders” and “greenmailers” out for short-term results at the companies they targeted, have grown up and spawned a new generation. They have even been granted their own moniker — the “sons of activists”.

Managers such as Scott Ferguson, the first analyst Bill Ackman hired at Pershing Square in 2003; Alex Denner, a Carl Icahn acolyte; and Quentin Koffey, who spent seven years at Elliott Management before joining DE Shaw to launch its first activist practice, have struck out on their own and are garnering attention from investors and corporate management alike.

Although more than willing to launch a proxy fight or file a lawsuit, many of the up and coming generation are eschewing the public disputes and open confrontation that made their former bosses famous. Instead their style of investing — more data-driven, eager to work with management behind the scenes and to hold positions for longer — shows just how activism has evolved.

“The goal is the same, making money,” says Joseph Perella, the co-founder of Perella Weinberg Partners, the New York investment bank. “[But] there are more players in the activism space now and more importantly, they are much more institutional than back when activism was getting started in the 1980s.”

Managers are now more focused on making money for their investors, rather than just themselves, he adds.

Activists had one of their busiest years ever in 2017, deploying $62bn in campaigns, more than twice the amount of money spent in the whole of 2016 says Lazard. They are also more influential forcing change at global companies such as Nestlé, DowDuPont and Procter & Gamble — while managing the money of pension funds, university endowments and charities around the world.

The biggest names in shareholder activism — Mr Icahn, Paul Singer of Elliott Management, Nelson Peltz at Trian Partners, Jeff Ubben of ValueAct and Barry Rosenstein of Jana Partners — are not necessarily slowing down, but the field is getting more crowded as their former portfolio managers strike out on their own.

“They are definitely respected and companies do pay attention when one of these ‘sons of activists’ shows up at their doorstep,” says Rich Grossman, a partner at New York law firm Skadden Arps, which defends companies against activist campaigns. “Some of them have raised significant amounts of money in their own right and have substantial funds at their disposal.”

Activism emerged in the 1980s, with the likes of Mr Icahn, now 81, and Mr Peltz, 75, buying stakes in companies and then leveraging them to lobby for change. They went on to lead campaigns against the likes of RJR Nabisco, AIG and Heinz. The most common requests were for spin-offs, a sale of the company, a management shake-up, board seats, share buybacks or a restructuring.

Activist battles 1: Lowe’s

© Getty
An $84bn US home improvements chain based in Mooresville, North Carolina, with almost 1,900 stores across the country. However, it has long trailed rival Home Depot in sales.

DE Shaw & Co took a stake worth just over $1bn in January 2017? It believes the company is underperforming, some shareholders are said to be similarly frustrated.

In January Lowe’s settled with DE Shaw, adding three new directors to its board following “constructive discussions”. DE Shaw is said to be exploring ways the company can cut costs and improve revenues.

Often criticised as being short-term shareholders who bought stakes in companies and demanded money, or some type of pay-off, to go away — dubbed greenmail — activists have sought to rebrand themselves as “constructive activists”, or even “highly-engaged shareholders”.

While some remain on the more aggressive side, many stress that they are holding positions for longer and not clamouring for share buybacks or quick sales, but rather urging changes they claim will help the company long-term.

“Greenmail doesn’t really exist any more . . . the activist investors are acting for all shareholders now, not just to get a quick payout for themselves,” says Andrew Bednar, a partner at PWP. “Activists have had to become more operational, strategic and longer-term investors in order to deliver company changes that drive shareholder value. The quick sale for a premium is less common today.”

The success enjoyed by activists has made some companies more receptive to settling behind closed doors rather than allowing battles to spill into the public arena, which has led to a less hostile style of activism.

“Shareholders feel that there is no monopoly on good ideas,” says Mr Grossman who coined the phrase “sons of activists”. “They don’t always agree with the activists, but I think management teams and boards are in large part listening to what they have to say and evaluating what makes sense.”

The number of public boardroom battles between activists and companies in the US, known as proxy fights, fell to a five-year low in 2017, according to data from FactSet, despite activists spending more money in their campaigns than ever before — Nelson Peltz has taken a $3.5bn stake to win a seat on the P&G board — as they aim for larger targets.

Activist battles 2: Innoviva

A respiratory drug company that receives royalties from GlaxoSmithKline for its asthma medications.

Sarissa took an initial stake of about 2.7 per cent in the company 12 months ago, complaining that it was spending too much on executive pay for a company just collecting royalties.

Sarissa launched a proxy fight for three board seats in April 2017. After the board reneged on a verbal compromise deal to give the fund two seats, Sarissa sued. In December a Delaware court ruled in favour of Sarissa, granting it two board seats.

Jim Rossman, the head of shareholder defence at Lazard, says that activism has now “gone completely mainstream” in terms of how many companies face attacks, and that it is now “rare” for him and his colleagues to advise a board that doesn’t have a director who hasn’t already experienced an activist campaign.

“There is no company immune, there is no inoculation shot you can get to avoid activism if you’re a major global company,” he says. “It used to be you’d go into boards and they’d ask, ‘tell us who these guys are, are they really staying around, and are they serious, and can’t we just tell them to go away?’ That’s gone. There are now two or three people in every boardroom who have experienced it and can reference their own war stories.”

But Marty Lipton, the godfather of shareholder defence and a founding partner of the law firm Wachtell, Lipton, Rosen & Katz, says that hedge fund activists are “changing and taming their strategies” because of a growing wariness of their intentions.

“Shareholders are increasingly concerned about how the short-term goals of activist hedge funds are undermining the long-term value of their investments. [They] are also worried about the impact these strategies have on other stakeholders, which can include local communities, employees and the environment,” Mr Lipton says.

Despite their omnipresence, the older generation mostly underperformed the newer guard last year. Mr Ackman and Mr Peltz had lacklustre returns, while Mr Ferguson’s fund, Sachem Head, brought in close to 13 per cent, and Sarissa, run by Mr Denner, was up about 15 per cent, say people familiar with the funds. Marcato, an activist fund run by Mick McGuire, another former Pershing Square manager, returned more than 25 per cent last year. According to data from eVestment, activist funds with less than $5bn in assets under management outperformed those with more than $5bn over the past two years.

Other members of the younger generation have already made names for themselves: Keith Meister, an Icahn protégé, has built Corvex Management into a $7.4bn fund; Mason Morfit took over at ValueAct from Jeff Ubben last year as its chief investment officer; and Jesse Cohn, became the youngest-ever partner at Elliott Management aged 36.

Activist battles 3: Autodesk

A California-based software designer that supplies the engineering, construction and manufacturing industries.

Sachem Head took a 5.7 per cent stake in Autodeck in 2015, and began pushing it to trim costs and buy back shares.

The fund, partnered with Eminence Capital, wanted seats on the board. Autodeck settled by offering three, including one for Ferguson. It later initiated a share buyback scheme and said chief executive Carl Bass would step down. Ferguson agreed to leave the board once the CEO is selected.

Marlin Naidoo, the global head of capital introduction and consulting at Deutsche Bank, who helps hedge funds raise assets from large institutional investors, says the younger generation are benefiting from investor appetite for new managers and inflows to activists.

“Investors typically like something that is newer,” he says. “With a lot of the established managers, investors have had a decent amount of time to take a view as to whether they want to allocate to them or not.”

To date the 48-year-old Mr Denner has been among the most successful of this new wave. Last month, Sanofi the French pharmaceutical company said it would buy Bioverativ, a US biotech group focused on haemophilia treatments, for $11.6bn — a premium of about 64 per cent to where it was trading before the deal was announced. A year earlier, Ariad Pharmaceuticals was sold to the Japanese drugmaker Takeda for nearly $5bn, a 75 per cent premium.

At the centre of both deals was Mr Denner, whose activist fund was among the largest shareholders in the target companies. Sarissa invests solely in biotech and pharmaceutical groups and Mr Denner, who spent about five years working for Mr Icahn, manages just over $600m at the fund, making him one of the more niche activists.

In the Ariad campaign, Sarissa bought a 6.2 per cent stake in the company in late 2013, when the shares were trading at around $3. The company was struggling: its shares had plummeted after the US Food and Drug Administration put a partial clinical hold on enrolment for trials of its leukaemia drug, Iclusig, over concerns it caused blood clots.

Within two years, Mr Denner had ousted Ariad’s chief executive, Harvey Berger, and won two board seats, including one for himself. The company, in its attempt to fend him off, adopted a poison pill strategy, blocking him from taking a larger stake than he already held. Despite that, Forbes estimates that Mr Denner made about $260m on the deal — after Takeda offered $24 a share for the drugmaker in 2017.

“The best thing that ever happened to shareholders of Ariad is that he made quick work” of the company’s attempts to bar the door against him, says one person involved in the deal. “He bought the stock in the low single-digit dollars per share, became the chairman, found a new CEO and a few short years later sold the company for $24 per share in cash.”

Mr Ferguson, 43, rose to the position of partner at Pershing Square before leaving in 2012 to start Sachem Head Capital Management, named after an area on the Connecticut coast where he grew up. The mid-sized fund manages just over $4bn. Although still dwarfed by the largest activists like Elliott, which oversees more than $34bn in assets; ValueAct, which handles about $15bn; and Third Point, which has around $17bn, industry watchers say Mr Ferguson has the potential to become a big player in the sector.

He is one of a growing number of US activists looking to Europe for investment opportunities. According to Lazard data, the amount of money deployed by activists in Europe last year was $22bn, more than double the $10bn annual average spent on the continent from 2013 to 2016. Nearly 30 per cent of campaigns last year were against European targets, primarily driven by US activists looking for undervalued stocks.

Last year, Mr Ferguson took a 0.4 per cent stake in the $47.3bn drugmaker Shire, and is pushing the UK-listed company to spin off some of its divisions or possibly put itself up for sale. The fund has also led activist campaigns against Autodesk, the US software company, the American hospital staffing supplier TeamHealth and the payments group Worldpay. Whitbread is also under pressure from Mr Ferguson’s lobbying to spin off its Costa Coffee chain.

Despite spending nearly a decade with Mr Ackman, Mr Ferguson seems reluctant to seek the limelight like his former boss. One manager who worked with him at Pershing calls him “smart, capable”, but likely to be “boring” in terms of his public profile.

“He’s thoughtful, and he’s taking his time to develop his ideas,” says a banker who advises on shareholder defence. “People think of him as a straight shooter, not someone who is difficult to deal with.”

Three rising stars

Scott Ferguson
The Connecticut-born Ferguson, 43, educated at Stanford University and Harvard Business School, was introduced to Bill Ackman through Phil Hilal, one of his classmates at Harvard Business School. Mr Ackman was looking to hire his first analyst at Pershing Square, and asked Mr Hilal, now the founder of the hedge fund Clearfield Capital, for a recommendation. The latter called Mr Ferguson one of his smartest classmates at business school, and Mr Ackman recruited him. He left to set up Sachem Head in 2012. Last year it produced returns of close to 13 per cent.

Keith Meister
A former player on Harvard’s American football team, the burly Meister, aged 43, is a protégé of Carl Icahn. With about $7bn in assets, he has built his fund, Corvex Management, into a formidable player. Of late he has made a foray into Europe, building stakes in Danone and — through a joint investment fund — the Swiss chemicals group Huntsman. Meister helped build up the latter stake to 25 per cent before selling it to Saudi Arabia’s state-controlled Sabic group in January.

Alex Denner
Raised in a working-class suburb of Boston, Massachusetts, Denner, 48, has inherited some of the scrappiness of his former boss, Carl Icahn. He has not shied away from launching proxy fights or filing lawsuits, and yet has managed to win over many industry advisers who put together defence campaigns to thwart activists. His fund, Sarissa, focuses on targets in the biotech and pharmaceutical markets.

Mr Koffey, 40, joined DE Shaw in May last year to help build the $45bn hedge fund’s activist practice. Its first public move was in EQT, a US energy group, where it lobbied the company to split its production and midstream businesses. The move was in line with Mr Koffey’s experience — he spent seven years at Elliott mostly focused on the oil and gas sector.

But it was DE Shaw’s settlement with the US home improvement retailer Lowe’s last month that indicated the fund’s willingness to take positions in sectors outside energy. The retailer bowed to activist pressure to add three new directors to its board following what it called “constructive discussions” with the fund. The entire campaign was kept private until the settlement.

For some industry watchers the episode underlined a change in approach, that this generation is not just less confrontational in public, but also easier to work with behind the scenes.

“Jeff Ubben used to stalk around boardrooms trying to intimidate directors, and Bill Ackman would just keep calling every eight minutes,” says a lawyer who worked opposite both of them. “The Fergusons and Denners of the world aren’t going to try to intimidate anyone.”

Additional reporting by James Fontanella-Khan in New York

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