When a company makes a decision that may benefit shareholders, who gets the credit? Is it the activist who popularized the idea? Or the chief executive and board that made it happen? Lately, it seems to be the former, which must nettle the CEOs at places such as Dow, DuPont, General Electric, Qualcomm , Ebay and now Xerox.
The dynamics surrounding shareholder activism and corporate strategy are shifting once again. When the surge in activism began a couple years ago, savvy investors were seen to be stepping in with some tough love and great ideas to help companies find their way (and of course, make themselves lots of money in the process). But if you peel back the onion in some recent situations, the activist is playing the role of a stock picker, essentially endorsing what the CEO already seems to be doing and rallying support from other shareholders.
Activists have turned much more passive, yet it feels like they're increasingly getting the praise. Some folks are starting to recognize this dissonance. Earlier this month, Rob Kindler, Morgan Stanley's head of M&A, said shareholder activism as an investment strategy "absolutely has peaked." There are far fewer opportunities for activists to add value, and one of the reasons is that management teams are being much more proactive.
But now put yourselves in a CEO's shoes: You're running an enormous company, and because the environment is changing -- growth is slowing, investors are preferring simpler business structures -- you and your board are considering some big changes, the most obvious and trendy of which is a breakup. And you're weighing this while having to juggle the short term: quarterly earnings and a wave of M&A quickly transforming your industry and your end-markets. Then, a big-shot hedge fund buys some shares and publicly proposes that same, very obvious idea you've been thinking about. Your company's stock gets a 5 percent jolt. You just became the complacent, oblivious CEO, and the activist is the hero.
Ursula Burns, CEO of Xerox for more than six years and who has been at the company since 1980, touched on this thought today in a Bloomberg TV interview. First, some background: After the $10 billion maker of photocopy machines announced in October that it was undergoing a broad strategic review, billionaire activist investor Carl Icahn revealed a stake and sought talks with management. On Friday, Xerox said it decided to split into two publicly traded companies, separating its hardware and services much in the way Hewlett-Packard did, and also gave Icahn three board seats. When asked how she felt about Icahn getting much of the credit, Burns said:
My first reaction would be frustration. But it really isn't. At the end of the day, we've done the right thing for the go-forward for this company...How we got there is less important than where we got.
And in another interview, Burns said that while she did speak with Icahn and that he's pleased, he didn't drive the decision nor was he involved in the analysis regarding splitting up Xerox. Good for Burns, because while Icahn is an incredibly successful and respected investor, it seems to be clear where the credit's due in this case. And to be fair to Icahn, he doesn't seem to be taking the credit (see his tweets) as much as he's being given it, which just shows how we've become accustomed to viewing activists one way and CEOs another. When a potentially good decision is made, the activist gets the credit, and when a deal or strategic shift doesn't work, the CEO will receive the blame and is on their way to being the next Carly Fiorina.
Two years ago, I analyzed returns of companies that were targeted by activists from January 2009 through December 2013. These 81 stocks generated a 48 percent average gain, an impressive enough return to nip in the bud the notion that activist hedge funds benefit at the expense of other shareholders. And while I stand by the work, I also now realize that it assumed the activists were the catalyst for the value that was created, which may not have been entirely true in all of those situations.
Even so, an activist's presence can still be beneficial to a CEO when his or her own idea isn't producing the kind of shareholder interest that perhaps it should. When Nelson Peltz's Trian Fund Management disclosed a stake in General Electric in October, his firm released a white paper comically titled, "Transformation Underway...But Nobody Cares." GE, with Jeff Immelt at the helm, was months into an overhaul that the company had consistently vocalized to investors and which was well-covered by the financial media. But it wasn't until Trian took the stake that GE shares really began to take off (like most stocks, they're down a bit this year). I hear Immelt and Peltz are friends, but that still has to be a little frustrating for Immelt.
But so goes the activist effect.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Qualcomm ultimately decided against a breakup, something that activist investor Jana Partners had suggested the company consider. Gadfly's Shira Ovide and I agree that Qualcomm made the right decision, though a clear solution for the business's problems remains elusive (maybe M&A?).
This is assuming the breakup plan accomplishes anything more than a short-term stock boost, which I'm skeptical that it will. My Gadfly colleague Shira Ovide may have put it best: "World's most boring company becomes world's most boring companies."
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Tara Lachapelle in New York at firstname.lastname@example.org
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