When an activist gets involved in a company, it’s always worth paying attention to. In some cases, it can lead to outsized gains.
Dan Loeb’s Third Point just sold the majority of its Yahoo! Inc. (NASDAQ:YHOO) stake. After pushing for a board shakeup, and bringing in a new CEO, Loeb was able to more than double his initial investment.
Unfortunately, it doesn’t always work out so well.
Bill Ackman’s Pershing Square convinced ancient retailer J.C. Penney Company, Inc. (NYSE:JCP) to hire (now former) CEO Ron Johnson. But Johnson’s aggressive turnaround plan drove away the company’s core customers, decimating shares in the process.
At any rate, a persuasive activist can dramatically change the way a company is run. Investors in a firm that’s being targeted should be aware of the activist’s plan.
Third Point and Sony Corporation (ADR) (NYSE:SNE)
As of June 17, Loeb’s Third Point owned nearly 7% of Japanese electronics giant Sony Corporation (ADR) (NYSE:SNE). In May, Loeb began pushing the company to consider a partial spin-off of its entertainment division.
Specifically, Loeb wants Sony Corporation (ADR) (NYSE:SNE) to take 15-20% of Sony Entertainment public, selling the shares via a subscription-based rights offering to existing shareholders.
Loeb’s argument is that Sony Corporation (ADR) (NYSE:SNE)’s Entertainment division is an undervalued asset, and that by bringing it public, management could be better compensated for the division’s success. At the same time, it would raise money for Sony Electronics, which could funnel the funds into better products.
Notably, there’s a history of American activists trying (and failing) to persuade Japanese management, casting doubt on Loeb’s ability to influence Sony Corporation (ADR) (NYSE:SNE). Yet, with Third Point booking a huge profit on its Yahoo! investment, it could roll those funds into additional Sony Corporation (ADR) (NYSE:SNE) shares.
Trian Fund and PepsiCo, Inc. (NYSE:PEP)
Nelson Peltz’s Trian Fund is a big owner of PepsiCo, Inc. (NYSE:PEP). In fact, it represents a fifth of the $4.5 billion fund’s portfolio.
Peltz thinks PepsiCo, Inc. (NYSE:PEP)’s stock could double. His plan is to have Pepsi acquire Mondelez (also a big Trian Fund holding) in an all-stock transaction. Then, Pepsi would merge Mondelez with its salty snack division, and spin off its carbonated beverage unit.
Peltz argues that there are dis-synergies between PepsiCo, Inc. (NYSE:PEP)’s beverage and salty snacks division, and that even if PepsiCo, Inc. (NYSE:PEP) does not acquire Mondelez, the company should still be broken up.
The beverage division has become a cash generating machine, but with very low sales growth, while salty snacks account for most of PepsiCo, Inc. (NYSE:PEP)’s value and nearly all of its growth potential.
ValueAct and Microsoft Corporation (NASDAQ:MSFT)
Back in April, ValueAct revealed that it had bought up nearly $2 billion of Microsoft stock. The firm argued that despite Microsoft’s perceived failures in the PC space, the company was poised to become the largest cloud computing company in the world in just three to five years.
ValueAct has not (yet) publicly pushed for Microsoft Corporation (NASDAQ:MSFT) to change course. But Reuters reported that the fund is in talks with the Windows-maker for a board seat. Although ValueAct owns less than 1% of the company, it is said to be receiving the backing of some large institutional shareholders.
If ValueAct is able to exert any control over Microsoft Corporation (NASDAQ:MSFT), it will likely pressure the company to shift its focus to the cloud. That might be for the best, but could conflict with CEO Steve Ballmer’s recent aim to transform Microsoft Corporation (NASDAQ:MSFT) into a “devices and services” company.
Investing in activist stocks
As I’ve written previously, studies show that activist investors tend to benefit firms over time. That doesn’t mean that investing in an activist-targeted company will produce a guaranteed winner, but outside shareholders can definitely benefit.
Sony Corporation (ADR) (NYSE:SNE), PepsiCo, Inc. (NYSE:PEP), and Microsoft Corporation (NASDAQ:MSFT) are all stocks that should be watched from an activist standpoint. Along with earnings reports and ratings changes, interested investors should keep an eye on the activities of the funds involved.
The article 3 Activist Investor Stocks to Watch originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of Microsoft and PepsiCo. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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