Capitalism’s unlikely heroes.
In the past five years one firm in seven in the S&P 500 has been on the receiving end of an activist attack. Derided by managers as opportunist and short-termist, activists are in fact a force for good. More often than not, activist campaigns lead to a rise in investment, R&D and profits. They will benefit the public company.
But the past 15 years have cast a shadow over the public company. There was not much sign of scrutiny or wealth creation in fiascos like Enron and Lehman Brothers. Governance has been weakened by the rise of passive index funds, which means that many firms’ largest shareholders are software programs. Institutional investors prefer to sell at the first sign of trouble rather than manage problems—so chief executives obsess about quarterly earnings and grab pay and power while they can. At the same time, tycoons in Silicon Valley have often turned outside investors into second-class citizens, by creating special voting rights for their own shares.
Private-equity funds are another way of fixing misfiring firms. But activists have advantages over Wall Street’s buy-out barbarians. Instead of loading up on debt to finance the takeover of entire firms, they get the work done with a stake of, typically, just 5% or so. That means activists are good value because they use less debt, pay no takeover premium and extract far lower absolute fees.
European and Asian shareholders say they do not need activists because they have more power than American investors over managers’ pay and appointments. They typically dismiss Mr Icahn and his friends as an American solution to an American problem. And, for cultural reasons, the few European activists tend to be more diplomatic and consultative than their brash cousins.