The State of Shareholder Activism

The Harvard Law School web log has posted a Thompson Reuters research document discussing the state of shareholder activism. It provides a good summary of what transpired in 2008.

According to the document,  there were a total of 34 activist situations during the last four quarters. This compares to a total of 61 in 2007. While sluggish economic conditions may explain a decrease in activity toward the back half of the year in 2008, it is unclear what caused the total number of activism cases in the first half of the year to drop when compared to the first half of 2007. Might activists have foreseen trouble in advance of the marked economic decline?

The extreme drop off in activity in the fourth quarter of 2008 naturally leads one to wonder whether or not that trend will spill over into the first quarter of 2009. On the one hand one might argue that the severe sell-off in the equity markets might cause activists to focus more on investments they already have, rather than launching new battles. On the other hand, one might argue that the decline in share prices might exacerbate investor anxiousness and actually embolden activist type investors. Based upon the results in the fourth quarter and the lack of available financing in the marketplace (which might be used to fund acquisitions) our assumption is that the former argument will prove true. We anticipate that the number of activist cases, and perhaps the size of the targets will remain low in Q1 2009 when compared to the prior year.

ACTIVIST DEMANDS:

In the past, activist investors have aggressively sought board seats as a means of exerting their influence. This trend continued in the fourth quarter of 2008. In fact, in both instances of activism in the period board seats are/were sought. For the full year 2008 board seats were clearly the top demand as well. This is consistent with prior quarterly studies that we have conducted. Other demands included general measures to enhance shareholder value, and a split of the target company. Note however that even those cases where the activist sought to buy or sell the company they also tended to seek board seats, perhaps as a means of obtaining leverage.

SUCCESS/FAILURE DATA:

Of the two cases of activism in the fourth quarter of 2008 one has been resolved in the activist’s favor.(Sellers Capital won board seats at Premier Exhibitions.) However, one is still pending (ANS Investments vs. Magellan Petroleum). That is, no party has prevailed. For the full year 2008 activists have been successful in achieving their goals 29% of the time. However, the target company has been successful in fending off the activist 24% of the time. Compromise was reached in 38% of the cases, and to date 9% have not been resolved. In short, we believe the trend toward compromise will continue going forward. Our logic is that boards and activists realize that a protracted proxy battle can be time consuming, and cost a great deal of money. It also may have an adverse impact on the share price.

TARGET INFORMATION:

Consumer Discretionary and Information Technology companies were among the top targets. Consumer Discretionary companies have consistently been among the top targets during this time period. The sector’s prospects for future earnings and/or cash flow growth may be a lure for activist firms. Energy related companies were near the bottom of the list. Perhaps this is because activists didn’t see many opportunities to unlock additional value. With energy prices waning, however, perhaps this will change in 2009.

STANDOUT ACTIVISTS:

Well-known activist Carl Icahn made headlines in the second and third quarter as he fought for seats on Yahoo’s board. Icahn ultimately captured three board seats. Yahoo is in the midst of a turnaround and recently hired a new chief executive. Also early in the second quarter, Motorola said it will support two of Carl Icahn’s four proposed board nominees, settling a proxy battle. Meanwhile, Wattles Capital Management reportedly pushed electronics retailer Circuit City to sell itself. Unfortunately Circuit City filed for bankruptcy late in the year. In other activist news, Riley Investment Management sought board seats at Zilog, a technology concern. Zilog ultimately announced that it would appoint a member of the Riley team to its board. Also, JMB Capital Partners made headlines in its pursuit of board representation at Maguire, a California based Real Estate Investment Trust or REIT. Finally Pershing Square proposed that retailer Target spin off land it owns as a means of unlocking potential shareholder value. Target reportedly rejected the idea.

The original document can be found here.