Earlier this year, Ken Squire, who runs the consultancy 13-D Monitor, which follows those filings with the SEC, wrote an article in Barron's predicting that 2009 would be a "golden age" for activists (which I also predicted recently).His article made several strong points for why this should happen, including the low valuations, a favorable political climate likely to ease hurdles for activists to challenge companies, and shareholder discontent at record levels. Yet, this activist activity has yet to materialize. Why and when will this change? There is a finite set of large activist investors in the world today with the assets to take on large public company battles. Some of the biggest have included: Relational Investors (active in Sprint ( S), Home Depot ( HD), and National Semiconductor ( NSM) last year), Trian (active in Wendy's ( WEN) and Tiffany's ( TIF) last year), Carl Icahn (active in Yahoo! ( YHOO) and Motorola ( MOT) last year), The Children's Investment Fund (or "TCI," active in CSX ( CSX) last year), Jana Partners (active in Cnet last year), and Pershing Square (active in Target ( TGT) last year). Like most investors, they had terrible results last year, although their previous 10-year returns have been outstanding. These activists suffered more in 2009 than other hedge funds because of two reasons: (1) they typically run long-only or long-biased funds and therefore had very little hedged going into last fall and (2) they have concentrated portfolios of typically fewer than 15 holdings, which can work very well in up years but terribly in down years. These large activist funds have seen heavy redemptions in the last six months, and there is no reason not to believe they won't see more for the balance of this year. Even Jana Partners, which had relatively positive returns in 2008, has been hit with large redemption requests reportedly affecting 20% to 30% of assets.
- Hedge, in order to preserve partner capital in the event of terrible years like 2008. The days of long-only are over.
- Build a reputation for always doing right for shareholders (especially long-term holders). Some of the "quick fix" activists of the last five years never won the trust of large mutual funds and pension funds, who tend to be the biggest holders of stock of the large-cap companies. As a result, proxy contests failed to win over the support of this important constituency, for fear of how these activists would represent their interests properly.
- Focus more on strategy and operations, less on single events. There will always be a place for activist investors to go after a company, advocating they sell a single division, or do a quick dividend to shareholders. However, these situations tend to be more prevalent in small-cap companies. Large-cap companies, by definition, have more complex problems and require more complex solutions. The next generation of top activists will understand this and have deep expertise in their firms on strategy and operations.
- Use the tools of the Internet and social networking. In 2007, when I ran a successful activist campaign against Yahoo!, which resulted in unseating Terry Semel as CEO after a large "no" vote at the annual meeting, I owned 96 shares of Yahoo! However, I was able to get my message out to large and small shareholders via my blog, YouTube, wikis, Facebook and Twitter. More than calling attention to my ideas, these social networking tools allowed fellow shareholders to pledge support to my group and encouraged them to suggest additional ideas for how Yahoo! could improve. I was most surprised and pleased with how many existing Yahoo! employees participated. Yet, their interests were perfectly aligned with our groups: We were all stockholders of Yahoo! and wanted to see the stock price go up through needed changes, which the current board and management were not making. The next generation of large activist investors will be masters at using the Internet to conduct their campaigns.
- Be more collaborative, less combative with target companies. It will always be necessary to run successful -- sometimes nasty -- proxy contests against entrenched boards and management. In my opinion, the Yahoo! board, for example, will never respond to a "nice guy" activist approach. It is so entrenched and disconnected from the opinions of shareholders that it would be impossible to reason with them. There's a time to knock heads. However, some activists only knock heads. They only know how to hit one key on the piano. The next generation of activist investors will be able to play hard ball but tend to be much more collaborative with the board and the CEO -- at least at the beginning, until reasonable dialog leads nowhere. Such an approach is also far less expensive than an "all-negative, all-the-time" approach.