Thursday, January 29, 2015

One Sided Activism? A Note on the Symmetry of Market Problems and the Asymmetries of Activists

There are a couple of really interesting articles about activists in the last two Wall Street Journals.  The first is yesterday's "Activists Are On A  Roll With More to Come", which documents the power and success of activists, noting the growth in the number of campaigns and in the number of assets under control.  The article also notes the increased success rate of proxy campaigns.  

The second article, entitled A Radical Idea for Activist Investors presents a provocative question.  If Actists are so smart, why are they one sided in their attacks? As the article notes:

"The vast majority are making similar demands of their targets, delivered with what now feels like a dull percussion: Raise the dividend, buy back shares, cut these costs, spin off that division, sell the company."

Wouldn't we expect a similar pressure by activists encouraging at least some firms to invest more?  Shouldn't we expect at least some activists campaigns to push firms to be less conservative, to invest more, to pursue heretofore missed opportunities?  

The article suggests three reasons for the one-sided attacks.  First, CEOs can be driven by ego and are motivated to expand not contract.  Second, such an attack requires a longer term investment to reap rewards.  Activists tend to be more short term.  Third, it could cause destabilizing investor turnover as one type of investor replaced another.  (I confess to not fully understanding the latter idea.  How does this ever stop value creation?  Don't takeover attempts do the same thing?)

But I'd like to offer a fourth reason that activists are not prone to pushing firms to invest differently and it is simply this:  Activists are not by nature, build it, type individuals.  Also, the expertise it takes to recognize over investment is likely to be more plentiful than the type of expertise it takes to build something.  I'm not saying one of these skills is more valuable than the other, just that it is not surprising that activists don't possess these skills.  Also as the article notes:

"These are the very opportunities that private-equity firms exploit, capitalizing on the market’s impatience for such undertakings."

So from my perspective, there is nothing unusual about specific types of investors being adept at different approaches.  Both articles offer a lot of food for thought and are well worth reading.  

All the best,


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