BOSTON (Reuters) - There was a time when corporate executives immediately turned defensive when an activist investor demanded a management shakeup or stock buyback, but those times are changing.
Today some executives are willing to break bread with their erstwhile Wall Street foes to see if there is a way to find common ground before girding for battle.
It is too soon to declare peace is breaking out between corporate agitators and captains of industry, but more and more executives are willing to listen to their critics in recognition of the growing stature these activists command with institutional investors.
Take Apple CEO Tim Cook, for instance. He had dinner in October at the New York home of long-time corporate agitator Carl Icahn, who has been publicly pressuring the cash-rich iPhone and iPad manufacturer to share its wealth with investors by buying back $150 billion worth of shares.
The two men remain at odds on the wisdom of such a large buy-back but the relationship between Cook and Icahn, who owns 4.7 million shares of Apple, hasn’t yet turned adversarial.
“No one would have done that a few years ago,” Ken Squire who tracks activists at research firm 13D Monitor said after the dinner. “Now the stigma is gone. Activist investing is more accepted by investors and more respected by advisers.”
Within the $2.5 trillion hedge fund industry, activist investing is quickly becoming one of the hottest areas.
So far this year, pension funds and endowments have committed $7 billion, more than double last year’s amount, to activist funds, marking a new fund raising record, Hedge Fund Research data shows.
State pension funds in Massachusetts, New Jersey and Ohio plus Blackstone Group have all made commitments to activist funds.
Some of that rush of money is performance chasing. The average return for activist hedge funds this year is 14.12 percent. That is not as strong as the Standard & Poor’s 500’s 23 percent gain but far better than the average hedge fund’s 7 percent return, industry data show.
Activists have managed to steal the show when it comes to making headlines compared to other hedge fund managers. That has helped attract new money and made it harder for corporate executives to ignore them.
This year Icahn took to Twitter to make demands on companies or praise them for doing what he wanted. Only days ago, Icahn, a featured guest at this week’s Reuters Global Investment Outlook Summit, tweeted that a deal he struck with drilling contractor Transocean to pay a $3 dividend is “great news” for activist investing.
Third Point founder Daniel Loeb, who successfully pushed for Marissa Mayer to be tapped as the new chief executive at Yahoo in 2012, was one of the first hedge fund managers to establish a dedicated website to mount a campaign for a boardroom shakeup. Initially, Yahoo resisted Loeb’s saber rattling. After gaining three board seats, his word was critical on decisions like finding a new CEO.
More recently, Loeb is leading a new charge by noisily calling for big changes at auction house Sotheby’s (BID.N).
Despite the interest in activism, the strategy is also prone to high-profile failures, in part because it requires managers to go out on a limb and push for demands in a very public way.
This year there was no bigger example of that than William Ackman’s three-year campaign to force a turnaround at retailer J.C.Penney. It ended in August with Ackman resigning from the company’s board and his Pershing Square Capital Management booking a $500 million loss.
The defeat at J.C Penney was a humbling one for Ackman, whose $12 billion hedge fund still ranks as one of the more successful dedicated activist funds, posting a 20 percent average annual gain since it launched in 2004.
The high-stakes of activism may be why the number of dedicated funds like Pershing Square remain limited in an industry with more than 10,000 firms.
Hedge Fund Research says there are no more than 60 dedicated funds, even with several new ones launched over the past two years by Jason Ader, another Reuters summit guest, and Keith Meister, a former Icahn lieutenant.
The overall amount of assets controlled by activist funds is only $89 billion of the hedge fund industry’s $2.5 trillion. Some investors like Loeb, who engages in activist strategies, are not counted in these numbers because their firms pursue other strategies as well.
Still it’s hard to ignore how well activism is paying off this year.
Loeb’s flagship fund at Third Point, which also invests in debt, mortgage bonds and other strategies beyond activism is up, 19 percent. Eric Knight’s KnightVinke, which is currently prodding Swiss bank UBS to break apart its investment banking and wealth management business, is up 25 percent this year, according to an investor. Mick McGuire’s Marcato Capital Management, urging auction house Sotheby’s to use its money better, is up 20.7 percent this year.
Even Ackman’s Pershing Square, despite the beating it has taken on J.C Penney and its so far painful $1 billion bet that nutritional supplement manufacturer Herbalife will collapse, has managed to return 8 percent this year. The fund which was flat going into September has come roaring back because of gains at Procter & Gamble and railway Canadian & Pacific, where Ackman stormed the board after a hugely successful proxy contest and quickly replaced the CEO.
Even retail investors who don’t have the millions it takes to invest in a hedge fund can get exposure to the strategy through a mutual fund called 13D Activist(DDDIX), which invests in companies targeted by activists. That fund managed by Ken Squire is doing even better than the S&P with a 32.54 percent gain this year, according to Morningstar.
Of course many still view activists as nothing but loudmouth self promoters who push for change whether its good for the long-term health of a company or not.
Lawyer Martin Lipton, who invented an anti-takeover defense, wrote in March that activist hedge funds are practicing a form of extortion by “preying on American corporations to create short-term increases in the market price of their stock.”
In August, Hollywood star George Clooney waded into a war of words, calling Dan Loeb a “carpet bagger” who “knows nothing about our business” after the fund manager tried to push Sony into selling off parts of its entertainment division.
Activists say that griping is misplaced because when their campaigns are successful it benefits all shareholders, not just their respective funds.
“Effective activist managers are able to function as a catalyst to help improve the performance of the companies in their investment portfolio,” said Jared Landaw, an executive at Barington Capital now urging Darden Restaurants to separate Olive Garden and Red Lobster from the rest of its holdings.
“Unlike more traditional passive investors, they don’t just have to watch from the sidelines with their fingers crossed and hope their investment thesis will unfold,” He added.
As for the public muscle flexing that often give activists a reputation for being mean, that’s really not right, said Dan Loeb, the godfather of sharp letters. When fights turn nasty and divisive, “that is just a distraction and waste of time,” he said on CNBC this week.
with additional reporting by Katya Wachtel; editing by Matthew Goldstein and Andrew Hay