As investors mull the prospect of following Loeb into the trade, it’s worth asking: do investors benefit from shareholder activism? In general, the answer is yes, though there have been some notable exceptions.
Studies support hedge fund activism
A recent study titled, “The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Product Market Competition” found that activist investors tend to increase the productivity of the firms they target.
Specifically, the study’s authors concluded that:
“The overall evidence suggests a real long-term effect of hedge fund intervention on target firms’ fundamentals.”
Bill Ackman’s battle with Canadian Pacific Railway Limited (USA) (NYSE:CP)
Like Third Point, Pershing Square is also known for its activist investing. One of its most notable success stories is a relatively recent event — the firm’s investment in Canadian Pacific Railway Limited (USA) (NYSE:CP).
In February 2012, Pershing Square began pushing for a management change at Canadian Pacific Railway Limited (USA) (NYSE:CP). In a lengthy presentation, the firm argued that the railroad had been mismanaged, and was badly in need of new leadership.
After a proxy battle that lasted several months, Pershing Square won out, installing its candidate — Hunter Harrison — as the firm’s new CEO. Since then, Canadian Pacific Railway Limited (USA) (NYSE:CP) has been a great investment, rallying nearly 90% since Harrison took the helm.
As of its last 13F filing, Pershing Square continues to hold a significant amount of Canadian Pacific Railway Limited (USA) (NYSE:CP) stock — roughly 26% of Pershing’s portfolio.
Despite the tremendous rally, analysts at Raymond James still like the stock, upgrading it to Outperform late last month. In a note, Raymond James wrote that the company’s new management team was conducting a sweeping transformation of the company’s business.
Loeb’s fight over Yahoo! Inc. (NASDAQ:YHOO)
If investors are considering following Loeb into Sony, they are probably hoping for a repeat performance of his
Yahoo! Inc. (NASDAQ:YHOO) activism.
Loeb went activist in Yahoo! in September of 2011. Ultimately, it took him several months, but Loeb was able to capture three board seats and install Marissa Mayer as Yahoo’s new CEO.
Since pitching his case for Yahoo!, shares of the Internet giant are up an impressive 84%. With Loeb sitting on such an incredible gain, and looking to focus his efforts on Sony, it will be interesting to see if he dials back his ownership of Yahoo.
Either way, Yahoo! could have further upside. The company still owns part of Alibaba, and Yahoo! Japan — both assets could be monetized, as Loeb called for originally.
Meanwhile, Mayer has begun an ambitious plan to make the company more mobile-focused, aggressively acquiring startups to infuse the firm with superior talent.
Ackman’s J.C. Penney Company, Inc. (NYSE:JCP) failure
Of course, while Canadian Pacific Railway Limited (USA) (NYSE:CP) and Yahoo! proved to be tremendously successful, not every instance of shareholder activism works out.
Retailer
J.C. Penney Company, Inc. (NYSE:JCP) is an obvious example. Ackman’s choice for J.C. Penney’s CEO — Ron Johnson — undertook an aggressive turnaround strategy that ultimately alienated many of J.C. Penney’s core customers.
After same-store sales dropped by nearly a third, and the company blew threw roughly $1 billion in cash, J.C. Penney fired Johnson and went back to his predecessor, Mike Ullman. The company then ran an ad explicitly apologizing for the changes — as if to admit that the shareholder activism was a colossal failure.
Ackman remains invested in J.C. Penney, telling Women’s Wear Daily that his fund is “digging in.”
I hold J.C. Penney shares largely as a contrarian trade (Soros likely bought his shares for similar reasons). If Pershing Square does stick around, it will be interesting to see what further ideas they might have for the retailer.
Prospects for Sony Corporation (ADR) (NYSE:SNE)
As currently presented, Loeb’s plan for Sony Corporation (ADR) (NYSE:SNE) involves partially spinning off the firm’s entertainment division in a subscription-based rights offering. This would likely allow his fund to buy into the division at a bargain price.
While Sony Corporation (ADR) (NYSE:SNE) might’ve successfully leveraged its status as a conglomerate, the firm’s management has largely dropped the ball. Despite the fact that Sony owns a record label, makes PCs, and invented the Walkman, it was Apple Inc. (NASDAQ:AAPL) that was able to capitalize on the digital music revolution.
Separating electronics and entertainment would allow the company to focus, while giving management of the two divisions greater incentive to pursue success.
Ultimately, nothing may ever come of Loeb’s quest to see Sony change. Many notable Western investors have attempted to influence Japanese companies in the past — and they’ve nearly all failed. If Loeb succeeds, it would be a historic moment for activist investing.
Profiting from activist investors
Investors don’t have to be Bill Ackman or Dan Loeb to profit from activism — simply following these funds into their targets would’ve resulted in tremendous gains more times than not.
This stands in contrast to the beliefs of many market participants, who may see activist investors as opportunists, looking only to make a quick buck at a corporation’s expense. In fact, that notion may be behind the SEC’s current investigation into altering the rules regarding funds’ disclosure policy.
The SEC is considering tightening the 10-day window allotted for funds to disclosure their stakes. Unfortunately, as the authors of “Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy” argue, that could ultimately lead to less shareholder activism, and by extension, fewer opportunities for investors to take advantage.
But while investors still have the opportunity to buy into an activist’s target, they should seriously consider it.
The article Do Investors Benefit from Activist Shareholders? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
