Corporate raiding returns dissected

The era of the big lumbering conglomerate may be over, but activism is as hot as ever. Raiders are targeting bigger companies, launching more multipronged “swarming” campaigns and becoming increasingly global in their pursuits.

That’s FTAV’s main takeaways from Lazard’s latest shareholder activism report, which you can find here. Activists have continued last year’s pace in 2023, with activity in Europe and Asia counteracting a slowdown in the US.

The targets are also increasingly chunky — recent ones include Disney, Salesforce and Bayer with megacaps worth $50bn or more representing a record 16 per cent of campaigns in the first quarter of 2023.

David Kostin, Goldman Sachs’s chief US equity strategist, has actually just published some research into activism in the US, which has some fascinating findings (yes, we are a blast at dinner parties). You can read the whole thing here.

As you’d expect, activists typically target companies whose shares are underperforming rivals in their industry. The most usual distinguishing attribute is slower sales growth though, rather than outright lower valuations (albeit not by much).

The most common demand is for the company to ditch one of its businesses, followed by sell-thyself explore “strategic alternatives”, just giving investors money, blocking an acquisition or blocking a sale.

Now for the price action. The launching of a public campaign typically leads to a short term bump — a 3 percentage point outperformance versus the broader sector in the first week. Interestingly, targets also seem to outperform the week before the campaign goes public, which Kostin attributes to “activists building their stakes and perhaps the market reacting to rumours”.

However, most interestingly: the initial pop tends to fizzle, and typically the relative performance turns negative after six months, and sharply negative a year later. So the typical activist campaign doesn’t seem to Unlock Long-Term Shareholder Value etc etc. Nor did Kostin find any evidence of improving fundamentals through sales growth, for example.

Slightly confounding this contrarian narrative, the average outperformance stays positive though.

Kostin therefore reckons that money can still be made by simply piggybacking on to every activist campaign.

A wide performance distribution exists for both successful and unsuccessful activist campaigns and varies by type of activist demand. While the median activist target lagged its sector, the average activist target outperformed by 4 pp over 12 months. The asymmetric nature of returns suggests that “piggyback” portfolio managers with a consistent approach to investing in activist targets can generate positive returns over time.

So fill yer boots. After all, Goldman’s equity strategist also notes that companies seem to be throwing in the towel more quickly than in the past.