How to profit from the greed of activist investors

  Activist investors do not always have the best reputation, but currently they enjoy a good run. With selected stocks, private investors can benefit from their success.  

Although it tends to ruffle the feathers of company executives, activist investing is en vogue, and the players, who are currently equipped with a combined capital of at least $120 billion, usually like to turn a big wheel. Last year even Apple, the company with the world’s largest market capitalization, was affected.  

The company was confronted with the demand to buy back more of its own shares. This was not an isolated case; quite the contrary. In the past five years in the U.S., every second S&P 500 Index member had an activist investor on board. Furthermore, one in seven of the index representatives were exposed to targeted attacks. 

Hedge funds or private equity firms are the most frequent activist investors. They are accumulating shares of companies that, for a variety of different reasons, they consider undervalued. With the help of a large share position they then try to exert influence on the company.  

To unlock the hidden value, they demand the execution of one of several common strategies, including demergers or spinoffs, M&A-activities, share-buybacks, higher dividend payments, cost reductions, restructurings, change in strategies or personnel changes in the management board and supervisory board.   

Success rate in 2014 higher than ever  

The existence of this type of investor is not new. They have been around since the 1980s, only back then they were often called company looters. This criticism still flares up from time to time. One of the main concerns of the skeptics is the approach of holding the acquired shares for an average of only two years. But there are also a growing number of market participants who consider them as positive because their activities put pressure on lame management boards. 

Whatever the individual view is on the topic, activist investors can claim to be more successful than ever. At least this is the case in the United States. There, according to data specialist Factset, 344 cases of activist investor campaigns were registered in 2014. In comparison, in 2013 there were 271 cases, and in 2010 there were 219. 

This upward trend seems set to continue in 2015. After the first quarter, the number of campaigns (108) was higher than in former years, and if that pace continues, there could be more than 400 cases by year’s end. The success rate of activist investors in 2014 was 73 percent, according to Factset, the highest percentage since 2001 and more than twice as high as the weakest rate of 36 percent in 2013.  

Changes in the top management of Microsoft and Sotheby’s, the planned spinoff of Paypal from eBay and Alibaba’s share of Yahoo, as well as larger share repurchases at Apple and General Motors are only some examples of successful activist investor intervention.

Concept slowly goes global  

Meanwhile, the concept is also increasingly exported from the U.S. to the rest of the world, in particular Asia. As a result of close ties between companies and the big influence of founding families, especially in Japan, some action is needed. However, thee governance environment still makes successful active investor operations difficult. Recently, even in Japan, some movement in the rigid structures can be observed because change on the corporate level is seen as a means to combat the sluggish economy.  

Perhaps this observation has encouraged the hedge fund Third Point, run by Daniel Loeb, to invest in the Japanese robotics company Fanuc and to urge it to buy back its own shares. Also recently the hedge fund Elliott Management, founded by Paul Singer, has disclosed a stake worth $230 million at the Bank of East Asia in Hong Kong, which is still run by a family. 

Europe is also considered to be a growing playing field. In Germany, for example, U.S. activist investors have shown up every now and then for quite some time. However, in the past, not all attempts by U.S. investors undertaken on the old continent were successful. One failure was the planned acquisition of the German pharmaceutical trading company Celesio, where in the course of the takeover battle billionaire Paul Singer had also bought a stake. In Switzerland, U.S. billionaire Carl Icahn should not be too happy about his position in Transocean, where he has been officially involved since early 2013. At the oil service company, he has been able to enforce the payment of a special dividend, but the share price is in the doldrums. 


Investment candidates most easily found in the US  

Transocean is a good example of how it makes no sense to blindly follow the investments of activist investors. At the current level, Transocean is cheaper than when Icahn bought his stake, but the share price can only go up, if the price of oil recovers significantly.  

Compared to that, the Icahn bet on Apple seems more promising. Even though the share price already has risen strongly, the tech icon has – with Apple Watch and Apple Pay – two arrows in the quiver, next to its best-selling iPhone, that can help the company grow into a much larger dimension.  

Among U.S. stocks, Juniper Networks also could have more upside potential if the increased influence of Elliot Management on the decision-making bodies should prove to be helpful. In that case, even a sale of the world’s second-largest network equipment provider would perhaps no longer be taboo.  

Ariad Pharmaceuticals presents a kind of outside bet. The share price of that company has still only partially recovered after it collapsed in 2013 in reaction to the decision by the U.S. Food and Drug Administration to stop the clinical trials for the leukemia drug Iclusig. Perhaps the company will be considered to have more upside potential again if the activist hedge fund Sarissa Capital succeeds in its attempt to replace the Ariad CEO. 

In Europe, activist investor John Malone is involved at Cable & Wireless Communications. The U.K. telecom company aims to get a stronger hold in the Caribbean and in South America, which could be a lucrative idea with the help of the U.S. billionaire. Also in the U.K., an investment in Electra Private Equity by Edward Bramson, founder of Sherborne Investors, looks promising.  

Electra is one of the oldest private equity firms in the U.K., and Bramson, who has been very successful in the past, suspects there is a lot of hidden value in the share price of that company. In Germany, sporting goods manufacturer Adidas could be worth a look if the recently awakened interest of activist investors in that company leads to new dynamics at the dormant giant. 

An investment option is also provided by the 13D Activist Fund that has focused on investments in shares, which have become the target of attacks by activist investors. The fund, which just before its launch was classified as the most “stupid” investment of the week by U.S. financial site MarketWatch, has achieved a respectable increase of around 78 percent since the end of 2011.