My job as a reporter at The Deal magazine and Daily Deal newspaper is to write about the most credible and successful activist hedge fund managers, identify both their goals and incentives, and compare that to the message and performance of management at the company they are targeting.
These investors are much smarter than me, but over the past seven years I have tracked them down to explain how they operate. A wide variety of activist hedge fund managers have taken the time to let me interview them in the U.S., Europe and Asia. I've put everything I have learned about their popular and expanding craft in a new book called
Extreme Value Hedging
Good Activist Investors = Great Stock Pickers
Good activist investors, at their core, are great stock pickers.
Most experienced activist investors typically allocate
capital to companies that will improve in
value on their own, over a period of time. But, unlike
mutual funds or other
institutional investors, these insurgent investors won't sit back patiently and wait for that growth to happen.
Instead, activist investors, backed by an increasing amount of both high-
net worth and institutional money, identify
undervalued corporations, buy large minority stakes and do everything they can to make sure their investment's stock price is on an upward trajectory. To accomplish this goal, activists engage in a wide variety of tactics: anything from collaborating with
management behind the scenes to pressing for a value-enhancing
merger. Though public perception of activists has them always pressing for mega-deals, just as many of them can be found blocking mergers they consider illogical or destructive.
In some cases, divestitures are in order. A group of activists have been publicly prodding armored car transport company
, since 2004, with positive results. Its stock has more than doubled to over $50 a share over the course of their public agitation campaign, but the activists aren't ready to leave things alone yet. Greedy? At least one of the insurgents reports that, based on its "sum of the part" analysis of the company, it should be worth as much as $81 a share.
In many situations, activists, like those investing in Brinks, identify companies that they believe hold too many disparate businesses under one roof with limited strategic connections. Having too many different units makes it difficult for outside observers to accurately value each subdivision. In such circumstances, an activist can easily come along, analyze each division and decide that the company is worth more to
shareholders divided and sold into separate units rather than kept together as a whole. Under pressure, Brinks in 2006 already sold one division for $1.1 billion.
As a group, activists have, for the past decade or so, inhabited the U.S. and almost nowhere else, with the exception of a few insurgents dabbling in Europe. Only recently has the strategy exploded in size and number -- about 100 activists collectively direct about $150 billion in assets, and many insurgents oversee billions in AUM. In the 1990s, the vast majority of activists could best be described as small-time gadfly investors that would agitate for change at companies with significantly less than $100 million
market capitalizations. Today, these same
managers and many others have significantly more capital behind them, and they target
small, medium and
large companies. Many managers are now effecting change at large beasts, such as
( MOT) and
( ABN), each employing a wide variety of tactics.
They also have transformed in another way: expanding their base of operations outside North America in search of undervalued companies and geographically diverse portfolios. Inevitably, many have reached out all over Europe, Russia and Asia, where CEOs and corporate secretaries have little or no experience dealing with dissident investors.
Activist investors will make it their mission to prod those executives into share improvement actions, though their interests and the time frame for a
return on investments can diverge quite drastically. Some are short-term extortion artists that will extract stock
buybacks or special
dividends from management, leaving company coffers empty and long-term institutional investors high and dry. Other activists are governance investors who seek to align distorted executive compensation packages or make sure corporate directors have sufficient incentive to improve both
share-value. These governance activists are in it for the long haul, and they often have the tacit or public support of the institutional investor base.
Retail investors hoping to learn from or follow the share-price enhancing tactics of activist investors must be careful to differentiate between the short-term extortionists and the long-term governance investors.
Many private investors jump on board immediately after activist funds take their insurgency campaigns public. (That happens when an activist makes his or her hopes and plans for the company available for anyone to read in a public filing with the
Securities and Exchange Commission
). Free riders, as many activists call the cadre of investors that buy into the stock after them, often cash out a few days later, leaving a small spike followed by a dip in the stock price in their wake. Private investors would be better advised to follow the lead of long-term governance investors. Share improvement may take these activists a long time to achieve, but the results are typically better and enduring.