Spring 2014

INSIDE VIEW: Activist investors

Sumo wrestlersThere is a new generation of activist investors emerging. Kenneth J. Heinz of Hedge Fund Research says they are watching Japan and are eager become involved as advocates of shareholders and market efficiency alike.

Shareholder activism dominated investment and performance headlines last year, with high-profile campaigns involving leading activist investor hedge fund managers against management of large and mid-sized corporations.

Activist campaigns recently have targeted Yahoo, Apple, Fannie Mae, EADS, Sony, Target, JC Penny, Best Buy, Motorola, Pepsi, Dell, EBay, Actavis, Lion’s Gate and Herbalife.

In contrast to certain instances in which multiple activist investors may align with each other to oppose company management from a similar position, Herbalife has been an unusually dynamic situation in which high-profile activist investors have taken opposing long and short positions, with one activist aligned with management while another were in opposition.  

With the exception of Sony, recent activist campaigns have largely focused on US and European targets.

The US and European activist surge was driven by three factors: surging equity markets, exposing underperforming managements and strategies, increasing or normalising of investor risk tolerance and accessible financing afforded by low borrowing costs. Yields are lower in Japan than elsewhere.  

HOSTILE
There is a cultural resistance to aggressive activist techniques in Japan, but all of the ingredients that led to a surge in US and European shareholder activism are in place.

Japan may offer even greater opportunities in the years ahead.  

While activism can become public and turn into hostile pro-shareholder campaigns against entrenched management, campaigns typically begin as private and often collaborative dialogue between the activist and management.  

An activist investor is frequently a large, and occasionally the largest, shareholder in a public company, lending credibility to their positions as a result of having significant financial interest.

Dialogue often begins as suggestions for strategic enhancements, capital structure modifications, divestitures or alternative uses of cash, including dividends, which would increase shareholder returns.

Only as a result of reluctance or resistance by management to change, do most campaigns become more aggressive, public or hostile, including proxy fights for shareholder support, efforts to replace individuals on the company’s board of directors or attempts to remove existing management.

Japan chartUNREALISTIC
While it would be unrealistic to expect a flood of Japanese-focused campaigns targeted at the large conglomerate, a few well targeted and executed campaigns could serve to substantially improve returns for shareholders and investors.

This should also send a powerful message to underperforming and entrenched management that the activists are watching and eager to become involved, as advocates of both shareholders and market efficiency.

The end results of these are likely to be a win-win for investors and shareholders, with better equity performance for target companies and non-targets alike, in the short and long-term.

Kenneth J. Heinz is the president of Hedge Fund Research

©2014 funds global asia

Sponsored Profiles

Sponsored feature: Asset allocators – How do you track your decisions?

Apr 06, 2020

Mark Barry, Head of Asset Allocation at Milestone Group, explores how a simple question can highlight opportunities to automate and streamline your asset allocation investment process.

Sponsored feature: How is DLT changing the global securities services landscape?

Oct 17, 2019

By Jeslyn Tan, global head of product management, securities services, at Deutsche Bank

Sponsored feature: A new base for fund distribution

Oct 16, 2019

To get the most value out of the digitisation of investment fund distribution, a blockchain-based infrastructure is fundamental. By Olivier Portenseigne, Managing Director and Chief Commercial Officer, Fundsquare.

Sponsored profile: Bridging the gap

Mar 11, 2019

Private equity is a core part of the business for Caceis’ Hong Kong office, which looks after clients in China and Europe. David Li, chief executive officer, explains why private equity enjoys strong client demand and how it is being used to fund China’s international infrastructure ambitions.

Executive Interviews

Executive interview: Understanding geographies

Apr 06, 2020

Margaret Harwood-Jones, co-head financing and securities services at Standard Chartered, shares her insights on platform standardisation, opportunities in Asia and regulatory change to encourage...

Executive interview: ‘Bull markets don’t die of old age’

Dec 12, 2019

Having a balanced portfolio in the midst of the longest expansion in history is an investment imperative, Chris Alderson, co-head of global equity and head of international equity at T Rowe Price...

Roundtables

Hong Kong roundtable: A ‘fragile Goldilocks situation’

Apr 06, 2020

With the global economy at a crossroads, our panel of experts share their thoughts on the market conditions, geopolitical volatility and growth opportunities. Chaired by Romil Patel in Hong Kong.

Singapore roundtable: A horizon to hold long-term assets

Dec 12, 2019

Panellists discuss the geopolitical fractures concerning asset owners, Singapore as a hub for fintech start-ups and why it makes sense to raise capital from a Variable Capital Company (VCC). Chaired by Romil Patel in Singapore.