Activist Investors Backed by Large Funds Take on Big Targets

The world’s biggest fund managers are giving shareholder activists the muscle to take on larger companies from Dell Inc. to Microsoft Corp.

“They’re able to go after big companies because they are very effectively communicating with large institutional stockholders,” said Scott A. Barshay, a partner at the law firm Cravath, Swaine & Moore LLP, at the annual Bloomberg Markets 50 Summit in New York today. “That’s a very new phenomena.”

Activist investors, who typically take small stakes in companies and lobby for higher dividends, stock buybacks or management changes, have also recently targeted Apple Inc., Yahoo! Inc. and Chesapeake Energy Corp. with their campaigns. The activist funds are increasing in size, and large mutual funds have shown an increased willingness to back shareholder proposals.

Companies with a market capitalization of more than $10 billion rose to 5.7 percent of targets this year, from 2.6 percent in 2010, according to researcher Activist Insight. A study of 25 large mutual funds, including BlackRock Inc. and Dodge & Cox show they increased support of shareholder proposals by 33 percent from 2004 through 2012, according to Fund Votes, which tracks their voting habits.

“Probably the most effective activists today are the institutions themselves,” said Lazard Ltd. Chairman and Chief Executive Officer Kenneth Jacobs, who spoke on the same panel as Barshay. “What’s really happened in the market today is that what we call ‘activists’ have become a voice for those institutions.”

Activist Funds

Steve Ballmer, CEO of Microsoft said he would retire -- four months after activist fund manager ValueAct Capital Partners LP’s Jeffrey Ubben disclosed a $1.9 billion stake in the software maker. Carl Icahn has invested about $1 billion in Apple and said in August he wants the technology company to increase its buyback program to boost the share price.

The investors have also extracted higher prices from buyers by raising objections to large takeovers this year. The resistance comes amid a general rise in activism, with assets managed by activist funds more than doubling over the past five years, to about $73 billion as of the first quarter, from about $32 billion in 2008, according to data compiled by Hedge Fund Research.

Deal Rebound

Dell Inc. founder Michael Dell and Silver Lake Management LLC had to raise their offer to take the personal computer maker private, after facing objections from Icahn and other institutional shareholders, before the $24.9 billion deal could be approved. Dell won that approval this month. In April, MetroPCS Communications Inc.’s shareholders approved a sweetened deal to merge with Deutsche Telekom AG’s T-Mobile USA after Deutsche Telekom bowed to the demands of investors including Paulson & Co.

Lazard’s Jacobs has found himself under activist pressure recently. Last year, billionaire Nelson Peltz’s Trian Fund Management LP took a more than 5 percent stake in the company and criticized its cost structure and executive pay. Trian is still Lazard’s fourth largest shareholder with a 5.2 percent stake, data compiled by Bloomberg show.

A pickup in deal making globally will only follow a recovery in confidence among buyers, Jacobs said.

“We’ve had two factors in place for several years now: financing and valuation,” he said. “The challenge has been confidence,” which will return when “we start to get the real seeds of an economic recovery.”

Riskless Deals

While buyers have announced 1.64 trillion in purchases this year, up from 1.46 trillion last year, that’s still less than half the value of deals announced in the same period in 2007, before the global financial crisis.

“Because of the effect of the downturn you’ve got acquirers, or would be acquirers out there, who just want so little risk in deals” said Barshay.

Lazard has served as an adviser on 132 acquisitions this year, with a total value of $138 billion -- including the $23 billion takeover of Heinz Inc. by Berkshire Hathaway Inc. and 3G Capital Inc., and Amgen Inc.’s $10.4 billion purchase of Onyx Pharmaceuticals Inc., data compiled by Bloomberg show.

Cravath, Swaine & Moore was a legal adviser on Amgen’s deal, as well as Liberty Global Plc’s $16 billion takeover of Virgin Media Inc. this year.