BY MARLEY JAY
NEW YORK (AP) — Dow Chemical, DuPont and Yahoo didn’t so much leap toward new corporate futures this week. They were pushed.
Behind the $130 billion merger of Dow and DuPont and the impending breakup of Yahoo were large investment firms that were agitating for change.
These firms, known as activist investors, buy enormous numbers of shares in companies they think are not performing well and then use that power to influence corporate strategy. Sometimes activists will push a target company to distribute more of its cash to shareholders — which of course enriches the activists — in the form of a bigger divided or through share repurchases. Sometimes they want the company to change its corporate rules, break up, or join forces with a competitor.
Win or lose, they cause a commotion in boardrooms and on Wall Street, and they’re becoming a more powerful force.
The activist funds, says Columbia Law School professor Joseph Coffee, “have exploded like a giant balloon.”
According to HFR, a research firm that studies investment funds, activist funds now hold $122 billion in assets. That’s almost double their total from 2012.
Coffee says the moves have become more common because they often result in great returns for the funds. Stock prices of target companies can jump when an activist fund announces it has bought stock in them. That can win over other investors to their cause.
By the time the funds announce their demands, they have often already shored up enough support to get the company to do what it wants. Companies often won’t even put up a fight. Instead of starting a tussle, the company will simply offer the fund one or two seats on its board, giving the fund more power to influence the company.
Shyam Gidumal, a principal at the consulting firm EY, says many activist investors don’t want public confrontations. He says about half the time, an activist fund will buy shares in a company, have behind-the-scenes negotiations with management, and then sell their shares later without a fuss. In this way, these investors can have a big effect on the market even when they don’t get into feuds.
A downside, Coffee says: the fear of attracting attention from these funds forces companies to focus too much on short-term profits. “The impact of hedge fund activism is having a very adverse effect on companies’ willingness to invest in research and development or undertake long-term capital expenditures,” Coffee said.
It was Trian Fund Management, run by Nelson Peltz, who helped push DuPont and Dow together on Friday, a year after he argued the 200-year-old DuPont should be broken up into two companies.
Starboard Value, run by Jeffrey Smith, has urged Yahoo to separate its main Internet business from its very valuable stake in Chinese e-commerce company Alibaba. After a year of public wrangling, Yahoo agreed to separate the two businesses on Wednesday.
Here’s more about Peltz, Smith, and other notable activist investors:
Trian Fund Management
$12 billion under management
Notable campaigns: DuPont, PepsiCo
Trian first urged DuPont to split itself in two with the argument that it would improve its financial performance and boost value for shareholders. When the DuPont refused, Trian’s next step was a campaign to get seats on the company’s board of directors. Shareholders rejected that effort in May, but Peltz kept up the pressure and in October DuPont CEO Ellen Kullman resigned, helping open the path to this week’s deal with Dow.
In another campaign, Peltz tried unsuccessfully to get PepsiCo to separate its more successful snacks business from its beverage division, which includes Gatorade, Mountain Dew and Aquafina.
$4.5 billion under management
Notable campaigns: Yahoo, Staples-Office Depot, Darden Restaurants
After accumulating about $400 million in Yahoo shares, Smith urged the company to spin off its valuable stake in Chinese e-commerce company Alibaba. When that attempt fizzled, he successfully pressed Yahoo to spin off its core Internet business instead, a move announced this week.
Smith invested in both Staples and Office Depot and pushed Staples to buy its smaller rival. The companies agreed to a deal worth $6.3 billion in February, but the federal government said Monday it will try to block the sale.
Starboard took over the board of Darden Restaurants, the parent of the Olive Garden, arguing the company failed to improve the performance of the restaurant and mishandled the sale of its Red Lobster chain.
Pershing Square Capital Management
$14 billion under management
Notable campaigns: Herbalife, Target, JC Penney
Ackman is one of the better-known activist investors because his campaigns are so aggressive and because he often makes his case publically. He took a large stake in Target in 2007 and pushed them sell off their credit cards and spin off its real estate into a separate company. More recently he put money on a bet that shares in Herbalife, the vitamin supplements company, would fall sharply. After he made the bet, he very publically made the case that the company is overvalued and compared it to a Ponzi scheme, claims that, if true, would make his bet pay off big. Herbalife adamantly denies the claims.
$12 billion under management
Notable campaigns: Apple, eBay, Hertz
Icahn is often thought of as the father of activist investing. Once known for his hostile buyouts of companies in the ’80s, where a shareholder would buy a company against the wishes of the board, Icahn generally takes a new approach now. For example, he pushed for eBay to spin off its PayPal division, something eBay eventually did this year.
Another recent campaign: He accumulated $3 billion worth of Apple stock in 2013, then pushed for the company to use its cash to increase its dividend and buy back stock to boost the share price. His shares are now worth $6 billion.
AP Business Writer Ken Sweet contributed to this story.
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