What history teaches us about activist investors

Jeff Gramm, in Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, dates the birth of modern activist investing to 1926, when Benjamin Graham was poring over the accounts of Northern Pipeline in Washington. Graham, now lauded as the father of value investing, had an epiphany when he looked at the company’s $3.6bn (£2.9bn) in bond investments and compared this to its mere $300,000 in revenue. Northern Pipeline, he noted, traded at $65 and paid a $6 dividend but had $95 of surplus cash assets per share.

Unsurprisingly, Graham wanted the company to return capital to shareholders. He bought 2,000 shares in the company, which made him the most significant shareholder behind the Rockefeller Foundation. Meetings with the company were fruitless. Management, perturbed that a mere shareholder would claim to understand the inner workings of the business, came up with every excuse in the book to avoid budging on the matter. But Graham ultimately persuaded fellow investors to back his campaign and got his way.

Fast forward almost 100 years and activist investors, who nowadays tend to be hedge funds, are once again busy causing problems for boards after a relative lull during the pandemic. According to investment bank Lazard, the number of activist investor campaigns in Europe in the first three months of 2023 hit a record quarterly level, while global new activity in 2022 was the busiest in four years.  

Investors need to be aware of the impact that activists, who are pressuring management teams on issues from climate change policies to chief executive changes, can have. With FTSE giants such as Vodafone (VOD), Unilever (ULVR) and GSK (GSK) among those subject to campaigns of late, understanding the historical context behind the growth of activist investing can help retail investors to appreciate the sway that a hedge fund such as Elliott Advisors or Pershing Square can have if it takes a stake in one of their holdings.

American activism 

Modern activist investing developed in the US, and most of the key contemporary players are based across the Atlantic. Data provider FactSet has compiled a “SharkWatch 50” list of what it deems are the key activists in the market. The top 20 are below.

What we now think of as activist investing has modified significantly over the decades and, as Gramm notes in his book, a key factor behind this is how the ownership of public company shares has changed. When Graham was trying to get Northern Pipeline to return capital to its shareholders, share registers were significantly more of a closed shop than they are today. Shares were held in a relatively small number of hands, and it wasn’t until the middle of the century that equities were more widely owned.  

By this point, in the 1950s, there were signs of activist development. As Owen Walker points out in his Barbarians in the Boardroom: Activist Investors and the Battle for Control of the World’s Most Powerful Companies, US activists began to take a proxy approach by pushing for board representation and management changes at public companies. Twentieth Century Fox and Alleghany were notable targets. 

The landscape had changed significantly by the 1980s, when activist investors had morphed into ‘corporate raiders’ given their much more aggressive approach. Investors such as Carl Icahn, who has been in the headlines recently for losing $9bn from trades betting against the market, pursued hostile takeovers and then sold company assets. This approach in its purest form was ultimately short-lived due to legal and regulatory changes, with companies using methods such as the ‘poison pill’ to dilute a potential raider’s position through issuing more shares.

The story of Icahn’s involvement with Trans World Airlines (TWA) provides a nice encapsulation of the corporate raider approach. In 1985, he bought a significant stake in the company and then took it private in 1988. Icahn loaded the airline with debt, raising $660mn in junk bonds through investment bank Drexel Burnham Lambert. The investor came out with a tidy $469mn profit, while the airline’s key assets were sold off.

But the episode is described by Gramm as a “near catastrophe for Icahn”, who “was never willing to make the large capital investments necessary to make [the airline] competitive”. TWA filed for bankruptcy in 1992, burdened by its debts and significant pension obligations. Icahn left in 1993, after a restructuring deal was agreed that left him with a $150mn bill due to the airline. Workers, meanwhile, were faced with significant pay cuts.

Activist investor priorities shifted after the demise of the corporate raiders. Hedge funds grew in influence and developed a new approach. As Lazard notes, key activist demands now tend to be around management changes, M&A activity, business strategy, and capital allocation. Part of the story behind the growth of modern activist investing is also down to the perception of complacent shareholders – factors such as the growth in passive investing, as well as huge corporate failures at companies such as Enron, mean that activist investors have been able to argue that they can fill a much-needed gap. 

Sharks are circling London

London-listed companies are increasingly in the crosshairs of these activist investors. Professional services firm Alvaraz & Marsal argued in an activism report in December that the London market is particularly attractive for activists as the combination of low valuations and a weak pound creates “attractive opportunities for M&A, especially cross-border, and the kinds of asset disposals that can create ‘bumpitrage’ opportunities for activist funds”. The FTSE 100 index trades at 10 times forward earnings, a significant discount to the S&P 500's rating of 18 times, according to FactSet data.

Some of the biggest and most historic companies listed on the FTSE have had to fundamentally change their approaches under pressure from activist investors. While the more aggressive US style of shareholder activism has not come to the fore on these shores, mainly due to the different rights enjoyed by UK shareholders and a more intimate relationship between boards and major investors, that hasn’t stopped successful campaigns at significant businesses.  

In the investment world, one such example is Dundee-headquartered 135-year-old Alliance Trust (ATST). It went through a very public spat with US activist Elliott Advisors in the 2010s that forced it to make major alterations to its board structure and operations.

Hedge fund Laxey Partners got the ball rolling when it concluded that the trust’s significant discount to net asset value (NAV), of around 20 per cent, represented an opportunity to push for corporate change. Laxey's unsuccessful move to push for new investment managers and a share buyback attracted Elliott, which built up its position in the trust through its UK arm to become its biggest investor by 2014. Dissatisfied by the board’s moves to try to narrow the NAV discount (which was much wider than trust counterparts) and improve investment returns, the activist proposed three nominees for the trust’s board and a war of words soon erupted. Two of Elliott's board nominees would be taken on, along with a new independent director, but the hedge fund continued to build up its stake and pressure the board privately.

The trust ultimately agreed to slash its costs by a fifth and buy back shares to try to trim the NAV discount. The trust's structure was reordered and the internal investment management team was subjected to much greater scrutiny. The board would become composed of non-executive directors only, putting chief executive Katherine Garrett-Cox’s position in the spotlight. She was relegated to the head of investment management, and chair Karin Forseke resigned shortly afterwards. Elliott had won. 

Activist pressure increasing for oil and gas companies

One sector in which activist pressure is likely to continue increasing is oil and gas. Pressure on energy major boards around environmental and climate change issues has intensified in recent years, but if we go back a decade to goings on at Shell (SHEL) there were major warning signs about the way the wind was blowing. Under pressure from activist investors, the company slashed capital expenditure and costs and announced a multi-billion-dollar disposal programme. Financial Times energy commentator Nick Butler noted at the time that this would “send a shiver through the oil and gas industry”. More recently, Third Point called for the break-up of the company in 2021, saying its strategy – trying to balance its traditional business with increased investment in renewables – was "incoherent" and would be better served by separate businesses. That same year the little-known hedge fund Engine No 1 scored a surprise victory at Exxon Mobil (US:XOM), winning three board seats in its push for the US oil major to pare back emissions more aggressively.

These events came before Russia's invasion of Ukraine, which has given the oil majors the confidence to stick with existing strategies or even increase the focus on oil and gas. But long-term pressures have not gone away, as demonstrated by the recent events at Shell peer BP’s (BP.) AGM in April were hardly a surprise. At an event disrupted by protestors, 17 per cent of shareholders supported activist investor Follow This’s resolution that BP should align itself more closely with the Paris Climte Agreement’s environmental objectives. The resolution's vote share fell from the 21 per cent recorded in 2021, a sign that the energy crisis has led some investors to reconsider their priorities. Still, a big chunk of the shareholder base remains dissatisfied. Watch this space. 

Remuneration is also a big issue in the domestic market. There have been plenty of shareholder rebellions on this front in 2023, and some are tied to activists. At Restaurant Group (RTN), 46 per cent and 16 per cent of AGM votes, respectively, were cast against the directors’ remuneration report and the re-election of chief executive Andy Hornby as a director at the Wagamama and Frankie & Benny’s owner. The company is feeling the heat from activist Oasis Management, which owns over 12 per cent of the shares, wants a board seat and an independent strategic review of the business. Irenic Capital and Coltrane, other activists, are also notable investors.  

Sometimes campaigns can be conducted without much fuss. Last month Cevian Capital, the biggest activist investor in Europe, sold its entire holding in Aviva (AV.) after the insurer bumped up its shareholder payouts past £5bn, the level it had been calling for. Cevian, which first invested in Aviva in 2020, said that the business had “transformed from a poorly performing conglomerate to a focused and well-performing insurance company”. But Cevian also reportedly sold its Vodafone position this January after little more than a year, having failed to induce a turnaround in the company's competitive position or share price. A smaller Vodafone activist, Coast Capital, reportedly did the same. But the telecoms giant continues to face pressure from stake-building shareholders such as French industry billionaire Xavier Niel.

As the episodes discussed here demonstrate, activist investors have the money and the influence to change the direction of company strategy, and more besides. For retail investors in listed businesses, an understanding of the power activists can bring to bear, and the historical context in which they have developed, could be invaluable when it comes to making money themselves.