Mod Note (Andy): This post is a partial reprint from the December 7th edition of Jared's Daily Dirtnap Newsletter. If you'd like to read more, WSO readers qualify for a $100 discount to his Daily Dirtnap daily market newsletter...just email [email protected] and mention "WSO Monkey Discount". You can follow Jared on twitter at @dailydirtnap.
Gotta love journalism, for years everyone complained about how shareholders just sat there passively while management did whatever it wanted, now that we have activist investors, they are a bunch of pirates and sharks taking advantage of poor management. Okay guys.
I wanted to write a short piece about activism as a strategy, since hedge fund strategies seem to go in and out of fashion, and activism isn’t working so well this year. I think this is going to end up being a short piece. I think activism depends less on what structural changes you are able to make at the company and more on your ability to get other investors to pile on. So Bill Ackman is a very big name, and when he takes a position, there is a salutary effect. Definitely a strategy that is hard to pursue unless you have scale.
And that is pretty much the end of the discussion.
So why is it no longer working? Honestly, one of the reasons is that the universe of investable companies is pretty small, and after you get through the obvious ones that were not being run for the benefit of shareholders, there isn’t much left to do. Go overseas, maybe, but good luck.
This whole gig where you bully people into taking out debt and doing share buybacks, that’s just abusive and counterproductive.
I think most companies have a pretty good handle on what the big issues are that they face, probably better than some mook with a Bloomberg terminal, with his mook analyst crunching numbers. Kind of makes me think of Wall Street and Pretty Woman where you had Gordon Gekko and Edward Lewis pulling strings without maybe understanding the consequences. Some stuff is obvious, and some companies are a mess. But there’s not room for 100 hedge funds in here.
I think that 1) there are always companies not doing too well, 2) there are differing opinions on what is the right decision, and 3) there is an upside to taking an opposite stance for activist investors, whether they really benefit the target. This seems like plenty of room to me based on your logic.
Hedge funds in general are not doing too well this year, probably due to the growing industry in recent times making it more difficult to find uncrowded opportunities. The problem is more general than activism vs other in my view
Not sure that I completely agree with your assessment. In fact, I have invested in many activist targeted stocks this year that have greatly outperformed the overall market.
Maybe you could focus your piece on different types of activists such as the sharks you describe who just want companies to lever up and do buybacks…. But also the successful activists that help managers allocate capital in the best manner possible. Buffet talks about this concept a lot – that managers (CEO’s, etc.) are not necessarily best allocators of capital and may have come from other areas of the business (programmer, engineer, etc.) where capital allocation was not the primary skillset.
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