Aggressive activists usually succeed

No one on the corporate side wants to get that confrontational call or letter from a hedge fund or investor demanding a change in management. But a paper by two New York University profs in the February 2009 Journal of Finance concludes shareholder activism works – for shareholders, that is.

The study draws upon 151 hedge fund activist campaigns from 2003 to 2005, plus a second data set of 154 activist efforts spearheaded by individuals, private equity funds, VCs or other asset management groups. All of the campaigns studied involve aggressive calls for change such as gaining seats on the board, replacing the CEO, stopping a merger or pursuing strategic alternatives. Symbolic or minor changes aren’t included.

The authors look at stock price movement around the activists’ declaration of intent in a 13D filing and in the year following, as well as the types of change demanded and achieved.

The results?

  • Stocks of companies targeted by hedge fund activists earn a 10.2% abnormal return in the period around the filing of the 13D. Those facing other kinds of activists outperform by 5.1%.
  • Superior returns persist in the one-year period following the 13D. Hedge fund campaigns deliver an average 11.4% abnormal return after a year, and other activists’ interventions result in 17.8% outperformance.
  • When it comes to getting management to make the proposed changes, aggressive activists are more often successful than not. Hedge funds pushing a confrontational agenda win 60% of the time, and other investors achieve their objectives in 65% of the campaigns. Most commonly, they win board seats by threats of proxy contests.
  • Hedge funds often target more financially healthy companies and often demand cash payouts or share repurchases. Other activists are more likely to focus on changing strategies or spending priorities.

The study doesn’t focus on defensive strategies for companies – just outcomes. Prevention may be the best defense. In a time of depressed equity prices, management and boards should be taking actions (without anyone demanding change) to bolster shareholder value … reducing costs, strengthening the balance sheet, making needed changes in leadership.

Investor relations professionals, I suspect, can help mostly by serving as a timely and outspoken voice to convey shareholder concerns up the line – before anyone declares war through a 13D. Now, more than ever, IR should be listening and providing a conduit to management and the board.

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