Managing Quarter-End Chaos

Two Views on Shareholder Activism

6 January 2015

By Rob Berick

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In the seemingly never-ending flow of research studies on shareholder activism, two recently caught my eye.

McKinsey’s Preparing for bigger, bolder shareholder activist is definitely worth a look. Though I thought they missed a few important points in their counsel, their analysis of the key metrics that are triggers for activism was quite good. Without question, the most telling finding of this report for me was this:

“Notably, in our research, we found that executive compensation and a company’s gap in consensus earnings do not appear to be significant indicators of activist interest despite the frequent use of these metrics in activist-campaign rhetoric.” 

What’s that tell you about “Say on Pay”?! (¿Cómo se dice ‘Trojan horse‘?) Through this prism, it reminds me of the political strategy where a party puts an emotionally charged issue on the ballot merely to increase turnout of voters sympathetic to their candidate.

The 2014 Shareholder Activism Insight report by Mergermarket is very well done and slices data in some really interesting directions. For example, they found that “Corporate respondents (68%) are noticeably more likely than activist respondents (44%) to expect cash-heavy balance sheets to trigger activism in the years to come.” Their research also showed “eighty-six percent of respondents expect the financial services sector to see the highest levels of activism in the next 12 months.”

Perhaps the most interesting finding was with regards to targeted annual returns in activist investments. “The overwhelming majority of investors (80%) are targeting returns between 10% and 20% from their activist investments, while 20% of investors are targeting higher returns of 20% to 30%” versus the 52% who were targeting the 10% to 20% range and the 48% were targeting returns in the 20% to 30% range in the 2012 study.

According to Marc Weingarten, a partner with Schulte Roth & Zabel, “Many activists believe that the popularity of the strategy will lead to lower returns.”

Wonder if the investors of these activist funds will look for board seats if the fund’s returns dip too far below the industry?

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