Where Activist Investors and Investor Relations Intersect
August 26, 2015
Activist Investors have been called many names over the years. They were labelled as barbarians and raiders in 1980s and some have even equated them with sharks and vultures. Activists believe that they work only to safeguard the interest of shareholders by destroying corporate fat. Numbers seem to support activists in this debate. Activist investors have been able to generate superior returns for themselves and their partners. The Alternative Investment Management Association has released a research report detailing the growth of assets managed by these funds by 269% to about 120 Billion dollars in the five years ended December 31, 2014. Over a 13 year period, they have grown by a massive 4,344%. That is astonishing for an asset class even though it started from a low base of 2.7 billion $. The growth in AUM has been matched by the returns to investors. The same research reported annualized returns for the three and five-year periods ended Dec. 31 were 13.9% and 7.8% for activist hedge funds measured through HFRI ED: Activist index, respectively, compared to 6.1% and 4.5% for the broader hedge fund index the HFRI Fund Weighted Composite index over the same periods.
Activists have evolved from the 1980’s “barbarians” who preyed on usually weak, non performing companies. The aim then was to dismantle the company and sell off various pieces of the corporation. This was succeeded by the Leveraged buyout model which has now evolved into the Activist shareholder. In today’s yield hungry market, we have activists targeting mega corporations like DuPont, Apple and Microsoft. BlackRock’s Larry Fink, Presidential contender Hillary Clinton and Warren Buffet, all have criticized the short termism prevailing on Main Street due to pressures of Wall Street. A company’s size or share price is no longer a barrier for activists. Apple with its size and record breaking rise can attest to this fact. Many believe it’s a matter of “when rather than if” the company and its board will face a shareholder fight.
Investor Relations has become a vital tool for a company to protect its long term sustainability in face of shareholder activism for a short term bump in stock prices. The company needs to communicate not only its financials, but also a narrative to explain the story behind the numbers. It is imperative that a regular dialogue is established between the company and its shareholders. IR helps companies fight proxy wars waged by activists, by effectively and regularly disseminating corporate actions and their accretive effect on shareholder value. This engagement also reduces any unnecessary volatility in share prices. Companies which have been fortunate in running a successful Investor Relations campaign have been awarded with a valuation premium and long term support by its shareholders. Thus, investor relations can be ignored by boards only at their own peril.
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