Despite shareholder angst about declining cash flow and accountability, cases of investor activism declined in 2008. But even with stock prices swooning and many companies struggling to hang on in the shaky economy, activists forged ahead. “Shareholders of companies that were producing good earnings think that there is a lot of potential value to be unlocked,” says Glenn S. Curtis, director of strategic research at Thomson Reuters.
Only 32 cases of investor activism were reported in the first three quarters of 2008, compared to 53 cases during the same period in 2007. The data has not been tabulated for the fourth quarter of 2008, but indications are that it was equally quiet. The decline in activity is due in part to the difficulties that hedge funds are having and the dearth of new capital flowing into these funds. Activist success rates, however, continue to be strong, with 28 percent of cases resolved successfully in 2008 and 41 percent resulting in some kind of compromise.
Although activist investors in 2008 might have been less noisy, they aren’t going away. Curtis notes that shareholders are unhappy with decreasing stock prices and are pushing for cost-cutting measures—even if that means massive job cutting or acquiring or selling another entity.
According to Curtis, new activists pop up on his reports each quarter. “Carl Icahn receives a lot of press,” he says. “But there are a lot of smaller players who are expected to go forward.” Activists are beginning to making inroads in sectors they have avoided in the past, such as information technology and health care, as well as long-time targets such as consumer discretionaries.
“Information technology and health care have this aura saying they’re highly technical, but there is a lot of exciting potential value that might be unlocked going forward,” notes Curtis. He believes that consumer discretionaries may share the spotlight in 2009, but will remain in the top three categories of activist targets. The most common demands of activist investors include board seats and calls for a sale of the company or an acquisition strategy.
Activists are also pursuing smaller targets. A total of 10 activist situations occurred in the third quarter of 2008, with the Q3 average target having a market capitalization of roughly $4.93 billion. This significantly increased from $3.06 billion in the second quarter, but was a major decline from the first quarter’s $9.49 billion market capitalization.
Despite increased costs associated with lengthy proxy battles, Curtis believes that activism will continue to be a powerful presence in 2009. “Activists of all stripes will be in the marketplace and will be looking to increase value,” he says. “In 2009, activism will be alive and well.”
