Shareholder Activism On The rise

7/7/2014


Q I've been reading about companies under attack from shareholder activists — big investors who take a position in the company and attempt to influence, cajole, or even threaten management. Is this sort of activity becoming more common?

A Shareholder activism is definitely on the rise. According to a Citigroup study, almost one-sixth of companies in the S&P 1500 Index have faced a shareholder-activism campaign since 2006. Activity has accelerated recently, with activist investors launching an average of 240 campaigns in each of the last three years, more than double the pace of a decade ago, according to a McKinsey & Company report.

These days, activists are going after bigger fish. According to McKinsey, the average market capitalization of targeted companies in 2013 was $10 billion, up from $8 billion in 2012 and less than $2 billion at the end of the last decade.

Q What is driving the growth in shareholder activism?

A One explanation is that activist investing has generated superior returns. McKinsey looked at 400 activist campaigns (out of 1,400 launched against U.S. companies over the past decade) and found that among large firms, the median activist campaign generated excess returns persisting for at least 36 months.

Citigroup's research shows that since 2009, activist hedge funds have outperformed their nonactivist peers, generating a nearly 20% annual return versus 7.5% for hedge funds as a whole. Not surprisingly, such outperformance has spurred greater inflows into activist-driven investment funds, which in turn has forced activists to put that money to work by targeting more companies.

Q Will shareholder activism remain a winning strategy?

A Typically, investment strategies that draw a lot of money see their effectiveness deteriorate as the flood of funds outstrips the number of truly attractive targets. Still, a halo effect from activist investing may help individual investors. The growth of activist investing could motivate companies to focus on shareholder value.

Q What recommended stocks seem likely activist targets?

A Activists often target companies with underutilized assets or underappreciated businesses. Apple ($94; AAPL) has become the target of two activist investors over the last 18 months. The investors wanted Apple to significantly increase its stock-buyback program and dividend, although both have backed off their activism campaigns in recent months, partly because Apple has become a huge repurchaser ($18 billion in the March quarter). See Special Report for details. Apple is rated Buy and Long-Term Buy.

Another technology stock that could see activist activity is Cisco Systems ($25; CSCO). Although the stock has gained ground in the last two months, this company has two qualities that attract activists — big cash holdings (cash and investments totaled $54 billion at the end of April) and lackluster top-line growth (revenue is expected to decrease 3% in fiscal 2014 ending July). Cisco is a Long-Term Buy.

Q Can individual investors be activist investors?

A Obviously, if you have deep pockets, you can take a big position in a company and attempt to wield your influence. A more realistic avenue for individual investor activism is voting proxies. The deluge of electronic and snail-mail notices may seem more of a nuisance than an opportunity. However, those proxies present a variety of proposals, from executive compensation and governance issues to corporate control and environmental topics.

If you want to take activism to another level, anyone who owns $2,000 worth of a company's stock for one year can submit shareholder resolutions for a vote at the shareholder meeting. The company's willingness to fight a proposal off the proxy, as well as Securities and Exchange Commission regulations on what constitutes a viable shareholder resolution, will impact what submissions come to a vote.

Q Does voting proxies have any other benefits?

A By voting a proxy, investors maintain written communication with the company. That communication can be helpful in avoiding escheatment of your investments. All states require financial institutions, including brokerage firms, to report when personal property has been abandoned or unclaimed after a period of time specified by state law. The state then claims the account through a process called escheatment, taking ownership of the assets.

States have become increasingly aggressive with escheatment. For example, unclaimed property is Delaware's third-largest revenue source, generating approximately 16% of the state's general revenue fund in fiscal 2013.

To search for unclaimed property, visit the National Association of Unclaimed Property Administrators website (https://www.unclaimed.org), which allows you to search by individual state.


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