What is activist investing, and why is it so popular?
Recently acquired meat company Smithfield Foods could be split into three pieces because of a vocal, highly invested hedge fund
Just two weeks after Chinese meat giant Shuanghui International agreed to buy American pork king Smithfield Foods for $4.7 billion ($34 a share), activist hedge fund Starboard Value has posed a different idea: Break the company into three pieces — U.S. pork production, hog farming, and international sales — and lift its value to a whopping $7.1 billion ($44 to $55 a share).
Starboard's suggestion (a pretty strong suggestion, since it owns 5.7 percent of Smithfield's shares) follows a growing trend in activist investing, where activists are targeting larger and larger companies. In March, David Einhorn pushed Apple to cough up billions in dividends; in May, Daniel Loeb suggested Sony break off Sony Entertainment; Carl Icahn continues to needle Dell — the list goes on.
What is activist investing?
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Similar to the corporate raiders of the 1980s, activist investors, either by themselves or in groups, vacuum up a large number of shares of a mismanaged company, often securing themselves a chair at the board table. The point is to gain enough control to radically change how the company is run, which could mean replacing management, reorganizing spending, splitting the company in pieces like with Smithfield — anything to increase the company's value and kick up the stock price.
Why is this type of investing gaining popularity?
"Low interest rates and perky stock markets mean that assets being divested can fetch top dollar," says The Economist. And hedge funds have more money than ever — $73 billion — to throw around.
At the same time, the stigma once associated with activist investing has started to melt away. "They are more accepted by large institutional investors and corporate managers," Kenneth Squire, a former mergers lawyer tells Business Insider. The positive vibes make it easier for activists to drum up additional support — and harder for companies to resist change. The Economist:
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The result of more money, a friendly stock market, and outside support is that that activist investing — for at least a few top dogs — has proved wildly successful. Between January 2000 through May 28, Carl Icahn's Icahn Enterprises earned a 1,122 percent return (with reinvested dividends), compared to the Dow which earned 185 percent. And the activists themselves aren't the only ones benefiting. Icahn, "Wall Street's richest man," says in Forbes:
What are the risks?
Sometimes activists make decisions for a company that don't pan out. (See: Bill Ackman personally recruiting Ron Johnson to run JC Penney.) Failed strategies equal losses, not just for the activist, but also the other shareholders and the company — and the smaller investors who followed the activist with high hopes for the company's future, says Richard Satran at Business Insider:
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Carmel Lobello is the business editor at TheWeek.com. Previously, she was an editor at DeathandTaxesMag.com.
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