institutional investors vs. “activists”

As I see it, today’s activist investors are the successors to the corporate raiders/ “greenmailers” of the 1980s.  In some cases–Carl Icahn is an example–they’re the same person.

Greenmailers (a takeoff on blackmailers) would typically attack small cash-rich companies by buying a 5% – 10% equity position and threatening to launch a hostile bid to take over the firm unless they were bought out at a high price.  That price would typically be all the cash in the corporate treasury.

The tactic often worked.  A CEO who had spent thirty years clawing to the top of the heap  so that he could exercise power and reap large cash/stock rewards during a five-year tenure as chief executive, knew he would be out the door if a change of control took place.  So he might be all for acquiescing to the greenmailer.  Sometimes, too, a company might have questionable accounting or other dirty secrets that could scarcely stand to see the light of day.

The issue for other shareholders:  while the greenmailer would make a financial killing, he would leave behind a firm drained of cash and typically worth considerably less than before the greenmailer showed up at the door.

Activists play a slightly different game.  They attack large companies (perhaps because smaller prey has long since been devoured).  They typically invest millions of dollars in buying a company’s shares, but because of the size of the target, may only hold 1% – 3% of the outstanding equity.  Activists typically demand seats on the board of directors and offer “advice,” which may be sound (or may not), and which usually consists in actions like dividend increases, stock buybacks and/or spinoffs of business lines.  These are all levers designed to get the stock price up quickly–so the activist can sell and be on his way.

The threat is the same:  the sitting CEO has run a grueling thirty-year corporate marathon only to see the prize snatched away as he’s crossing the finish line if the activist decides that he’s part of the problem.

The issue for other shareholders:  none of the actions activists recommend may be good for the long-term health of the company (look at what happened to J C Penney).  And unlike the greenmail case, where the attacker’s threat is to take over the firm–meaning a profit for other holders and resolution to the issue–the activist may well tie up management time and energy with proxy fights or other distractions that go on for years.

Tomorrow:  what to do.

 

 

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