Activist investors have long been polarizing figures, but the past year has brought to a head the debate over aggressive investment tactics and their outcomes. Several high-profile names — among them William Ackman of Pershing Square Capital Management and Nelson Peltz of Trian Partners — are under attack from the companies they target and some other investors.
As a whole, activism hasn’t been yielding great results lately. Stocks targeted by activist investors lost 8 percent in 2015 while the S&P gained 1.4 percent, according to a review by London-based data provider Activist Insight with U.S. law firm Schulte Roth & Zabel. In January activist-targeted stocks suffered their worst month in years, losing 6.1 percent, Chicago-based Hedge Fund Research reports.
But one headline-grabbing activist investor — Jeffrey Smith, CEO of New York–based Starboard Value — remains hopeful. “We do have the benefit of getting [shareholders’] support often,” Smith tells Institutional Investor. “It’s because they believe the people we’re recommending for boards will do a better job representing the shareholders’ interests than existing board members.”
Smith, 43, founded the Starboard strategy with Mark Mitchell in 2002 under the aegis of Ramius, the global alternative-investment management subsidiary of New York–headquartered Cowen Group. They added Peter Feld to the team in 2005. Starboard Value spun off from Ramius in early 2011 and has since operated independently.
Starboard keeps its performance numbers close to the vest, but a look at recent positions shows mixed results. Darden Restaurants, owner of the Olive Garden chain and former owner of Red Lobster, has seen significant growth since Starboard began putting pressure on its board in late 2013, reaching a five-year high of more than $75 a share last summer. After taking a 5.6 percent stake, Smith and Starboard quickly pushed Orlando, Florida–based Darden to sell Red Lobster, and in the fall of 2014 they succeeded in replacing all of the company’s directors.
But other targets seem like they have yet to pay off. At last year’s Delivering Alpha conference in New York, Smith said that Starboard had taken a position in Macy’s and would encourage the retailer to sell its real estate. Macy’s stock spiked briefly after his July announcement but has since sunk from $72.80 to $42.32 as of February 23; in its earnings report for the fourth quarter of 2015, the company hinted at plans to start unloading property.
Smith’s recent attempt to turn around office supplies giant Staples by convincing it to merge with Office Depot has left the former with a stock price of $9.28 as of February 23, down from $16.59 in December 2014, when Starboard first argued that Staples was undervalued. At Yahoo, where Starboard had persuaded president and CEO Marissa Mayer to spin off the U.S. tech company’s stake in Chinese e-commerce titan Alibaba Group Holding, the board said in December that it will spin off its core businesses instead.
But even if Starboard’s positions haven’t panned out, businesses are changing their trajectories based on Smith’s advice. And though investors like Smith are often singled out as the faces of activism, the strategy appears to be gaining favor among those who typically take longer-term and less aggressive positions.
Last year 49 of the investors who launched activist campaigns against U.S. companies were new to the approach, versus 36 investors in 2014, reports Activist Insight, a London-based data provider. As shareholders get more comfortable at making demands, the strategy has begun to feel somewhat inevitable to investors, even if they pursue it reluctantly.
“It’s almost becoming an asset class,” says Robert McCormick, chief policy officer at global governance firm Glass, Lewis & Co. in San Francisco, who cautions against painting all activists with the same brush. “There are lots of different approaches,” McCormick adds, noting that many public pension funds are activists too, although they may call it constructivist investing and hold their positions longer.
Not all investors and shareholders see short-term positions as a negative, though. A recent study led by Lucian Bebchuk of Harvard Law School found that activist interventions tended to make companies and shareholders better off in the short and the long terms. Bebchuk sees activism as an important element of corporate governance: It “provides a source of market discipline that operates to the benefit of shareholders and the economy,” he says.
Smith takes that view with him when he wades into battle with boards, and it’s hard to deny that many shareholders agree. “Shareholders have become more willing to understand that they are the owners of the business,” he says. “They’re more willing to support change if change is warranted.”
Follow Kaitlin Ugolik on Twitter at @kaitlinugolik.
