Activist investors, buyers who take stakes in companies and agitate for shareholder-friendly changes, are likely to increase the number of targets this year as they win battles and raise new cash to fund their agendas, according to Moody’s Investors Service.
Shareholder activism often comes at the expense of lenders, the New York-based ratings company said in a report yesterday. Investors including billionaire Carl Icahn sought changes at 220 North American companies last year, up from 179 in 2011.
“Activists have been going after ever-bigger names, suggesting that more rated companies will be caught in activist crosshairs in 2014,” Moody’s analyst Chris Plath wrote in the report.
The trend is being fueled by “the tremendous pile of cash” companies hold, low borrowing costs and the reputational change of activists as “agents of longer-term change for the good,” Moody’s said in the report. Corporate boards are finding it increasingly difficult to ignore activist demands as they gain respect from institutional investors and lose the reputation of “uncouth 1980’s-style corporate raiders chasing quick rewards,” according to the report.
Certain sectors have more vulnerability, including technology companies such as Apple Inc., health-care providers including Forest Laboratories Inc., and retailers such as Office Depot Inc. Activists home in on companies that consistently underperform, have assets that can be sold or lack financial discipline, Moody’s said.
While most activism affects smaller companies, some of the biggest firms are no longer immune from shareholder pressure, Moody’s said. Icahn prodded Cupertino, California-based Apple to buy back $50 billion of stock this year, though he abandoned the proposal last month.
Assets managed by activist hedge funds have increased to $93 billion last year from $65.5 billion in 2012, according to Hedge Fund Research data cited by Moody’s.
Not all activism disadvantages creditors. Icahn used his 10 percent holding in Chesapeake Energy Corp. to oust co-founder Aubrey McClendon. The new chief executive officer Doug Lawler is drilling fewer wells and raising cash through asset sales, helping the Oklahoma City-based company outperform peers in the bond market.
U.S. non-financial companies have about $1.5 trillion on their balance sheets, according to the report. Yields on corporate bonds globally have fallen to 3.49 percent, below the 10-year average of 5.03 percent, according to the Bank of America Merrill Lynch Global Corporate & High Yield index.