Poor-performing chief executives can sleep a little easier. Bill Ackman, one of the world’s best-known investors, has all but ruled out future activist campaigns in favor of a lower-key approach to influencing portfolio companies. That’s a commendable investment stance. But efficient capital markets still need the odd rabble rouser.
Ackman’s reputation has largely been defined by a small number of high-profile corporate conflicts, notably his short-selling attack on Herbalife Nutrition Ltd., the snacks and supplements business. That overshadows the fact that his listed vehicle, Pershing Square Holdings Ltd, mostly takes large stakes in companies, and those positions haven’t generated much strife recently.
Last week, Ackman told investors he’s abandoning activist shorting, which involves selling borrowed shares in a target and talking down the business. His thinking on intervening as a shareholder was more nuanced. Pershing Square “intends” to keep all its interactions with companies “cordial, constructive, and productive,” he said, calling this a “quieter approach.”
Intentions aren’t promises; quieter doesn’t mean silent. All the same, Ackman’s default style will be essentially active rather than activist – nudging bosses in private, rather than embarrassing them in public and threatening to use shareholder polls to impose change.
He may be forging policy from necessity. Short campaigns are all-consuming and crowd out other strategies. You can’t demonize one company where you’re short and then rock up at another as an investor saying you’re a supportive and constructive force. You get typecast, literally: As Ackman points out, his campaigns have inspired a movie and a book.
And whether as a shareholder or short seller, public battles are draining to wage and defend. The upside needs to be substantial to make them worthwhile. The reputational downside from failure is considerable.
Moreover, shouty shareholder activism works only in certain circumstances, and the opportunities may be diminishing. There needs to be a clear objective that can be delivered swiftly. Traditionally, this has involved optimizing a company’s capital structure — usually by taking on more debt — or breaking up a business to remove a valuation discount versus the sum of its constituent subsidiaries. Ackman himself successfully urged burger purveyor Wendy’s Co. to spin off its Tim Hortons chain of coffee-and-doughnut shops.
Two of the most successful campaigns of recent history were the opposition to mall owner Unibail-Rodamco-Westfield’s jumbo rights offering and the removal of yoghurt-maker Danone SA’s chief executive. To achieve such coups in France, among the toughest markets for activists, was a major milestone.
But those wins look anomalous. The low-hanging fruit of short-term activism has arguably been plucked. Where there’s a good case for breaking off divisions, even the largest companies are voluntarily getting on with it (think General Electric Co. and Johnson & Johnson.) Where splitting up is easier said than done, gaining widespread shareholder support for separations is hard (witness the pushback against Elliott Management Corp.’s campaign for a renewables carve out at utility SSE Plc).
What’s left tend to be trickier situations with the no obvious quick fix. Examples would be aerospace firm Rolls-Royce Holdings Plc, which attracted California-based ValueAct Capital in 2015 and, more recently, Vodafone Group Plc, the telecoms company targeted by Cevian Capital AB.
The question for lapsed activists like Ackman is what really distinguishes their approach from that of the conventional, engaged long-only investor. The answer should be that they can enhance a company’s performance through securing a hotline to the boardroom. The ideal target will be one where problems have created a discount valuation, and where the investor has more expertise than other advisers. Moreover, the target board must see the investor as supportive, with credibility amassed from previous corporate engagements. These boxes aren’t all going to be ticked easily.
Constructive dialogue between investors and their portfolio companies should, of course, be the norm, and the end clients of investment firms often fret when their money is put to hostile use. But noisy troublemaking has its place. Now and then, we need activists to make an example of a poor-performing company. The threat of a proxy fight keeps managers on their toes. If Ackman and other veterans are now less willing to shame underperformers, hopefully the next generation of investment managers, eager to make its mark, will take up the activist cudgels.
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