Give Heed to the Next Generation of Activists (And Their Targets)
The current generation of prominent activists may be tempering their appetite for proxy contests, but there are plenty lurking in the shadows ready to step up. We all know that Carl Icahn is getting out of the game altogether, and last week at Tulane University Law School’s Twenty-Third Annual Corporate Law Institute, Roy Katzovicz, Chief Legal Officer at Bill Ackman’s Pershing Square Capital Management, stated that they now prefer to take a limited number of positions (8-10) and maintain an activist position in only one or two holdings. In spite of these declarations, it is widely accepted that activism will creep back up toward the elevated pre-recession levels. So who will take their place and who will they target?
The answer is not all that surprising. In addition to mutual funds and Public Employee Retirement Systems and other non-traditional activists, expect smaller hedge funds to carry the weight, but don’t expect them to target Wendy’s, Lions Gate, Target and Genzyme. Instead, smaller hedge funds will target small and micro-cap companies, those with market caps below $1.0B for a host of traditional “activist approved” reasons, including financial and operational misses, stagnant management, poor corporate governance practices, and an inability to enhance shareholder value. These smaller proxy fights may not garner coverage from DealBook, Deal Journal and other media outlets, but they will provide value for shareholders.
At the same time, when larger targets come into focus, smaller activist funds have the ability to partner with other hedge funds to form a more formidable opponent. This was a successful tactic employed by a loose consortium of value-focused hedge funds that formed Value Investors For Change, who to date have led successful activist campaigns against MRV Communications and Osteotech [Disclosure: CJP represents Value Investors For Change in its proxy contests and is also the agency of record for MRV Communications post proxy contest].
One lesson for IROs is that you can’t just look at your institutional shareholder list and, absent the usual suspect, assume that you will not become a target of an activist campaign. Today, you need to listen to all investors, because when they talk with other holders (and they do), they might just be willing to band together to invoke change if they are disenfranchised (see my earlier post on this site entitled, “‘Tis the Season To Listen … And Do Nothing Else”).