July 4, 2022



Why some of the most feared activist investors are no longer so hostile

4 min read

In the decade after the 2008 financial crisis, hedge fund managers organised bruising public campaigns to unlock higher share prices at companies such as Procter & Gamble, the oil driller Hess and the Sotheby’s auction house, among others.

From Carl Icahn to Bill Ackman, Daniel Loeb, Nelson Peltz and Paul Singer, these billionaire activists ran some of the largest and most-hostile proxy battles ever seen on Wall Street, becoming an increasingly vocal force in global financial markets.

Now some are changing tack. Activists who once rallied stockholders to challenge boards and management are beginning to take a more low-key approach or are adding new tactics such as leading corporate buyouts, the traditional domain of the private equity industry.

Avinash Mehrotra, global head of activism and shareholder advisory at Goldman Sachs, said many activists are considering more moderate tactics as it allows them to grow their assets under management by attracting new investors who do not usually back aggressive hedge funds.

“Some activists may look at private equity as a way of growing their assets under management, but also as a way of diversifying their portfolios in an environment where public market valuations have been elevated over the past few years,” Mehrotra said.

Ackman, the founder of Pershing Square Capital Management, last Tuesday said he would cease running public campaigns. Ackman will instead focus on a more passive approach, taking large stakes in stronger-performing companies and advocating any changes from behind the scenes.

It has been five years since Ackman ran his last proxy fight, failing in an effort to win board seats at payrolls giant ADP. Previously, he had run campaigns to replace management at Canadian Pacific Railway and industrial giant Air Products and to break up consumer goods conglomerate Fortune Brands.

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In an annual report, Ackman said Pershing Square has evolved from “transactional activism”, where it would recommend asset sales and financial engineering, and its public battles to win board seats, to adopt an approach focused on “positive, constructive engagements”.

“[A]ll of our interactions with companies over the last five years have been cordial, constructive, and productive,” said Ackman in the letter, adding: “[I]f it is helpful to call this quieter approach Pershing Square 3.0, let it hereby be so anointed.”

Ackman is not alone in altering his approach. Recently, prominent activists such as Loeb’s Third Point and Peltz’s Trian Partners have won board seats and urged large-scale corporate change without resorting to proxy battles.

Loeb, long known as one of Wall Street’s most-ferocious investors with unsparing corporate critiques, in February praised ecommerce giant Amazon for its recent share repurchases and increased financial disclosures, suggesting they could be the basis for greater change.

Amazon’s new disclosures “help investors better understand the various parts of the business and significant sum-of-the-parts value”, Loeb said in an investor letter. “We expect these shareholder-friendly moves may be just the tip of the iceberg as Amazon’s talented and focused new CEO Andy Jassy sets out his plan for the company’s future,” he added.

Singer’s Elliott Management, the largest activist investor globally with more than $50bn in assets, has made headlines this year by orchestrating large leveraged buyouts, rather than stinging rebukes of corporate strategy.

The firm organised the $16.5bn takeover of US-based software provider Citrix in January. Then, earlier this week, it agreed to buy TV ratings group Nielsen for $16bn, alongside Brookfield Asset Management.

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In 2015, Elliott created a tech-focused private equity arm called Evergreen Coast Capital, which has become an increasingly powerful force in global buyouts. In November, it and private equity firm Veritas Capital sold Athenahealth for $17bn, a deal that made the firm billions.

“[T]he normalisation of activism means that now some players can move seamlessly back and forth between activist behaviour and private equity behaviour,” said Jim Rossman, co-head of capital markets advisory at Lazard. “It’s the maturing of certain players.”

Icahn, at the age of 86, has also opened 2022 with a radically different style, running unorthodox campaigns for the better treatment of livestock at fast-food chain McDonald’s and grocer Kroger.

The animal rights campaign at McDonald’s, partially motivated by a recommendation from his daughter Michelle, is not aimed at unlocking unseen shareholder value at the restaurant group, in which he holds just a nominal investment.

Icahn’s new tactic underscores the increasing prominence of issues-based activist campaigns, run on grounds of social good and environmental sustainability. In 2021, Engine No. 1, a tiny activist fund focused on climate change, was able to win multiple seats on the board of ExxonMobil, gaining the support of BlackRock, Vanguard and State Street despite owning $50mn of its shares.

Though many of the most prominent activists are changing their tone, and new regulatory proposals surrounding the timing and scope of disclosures hedge funds must make on their positions pose big threats, the strategy is not dying.

In December, health insurer Centene struck a settlement with Politan Capital Management, a new activist fund created by Quentin Koffey, a former portfolio manager at Elliott. In early March, the retailer Dollar Tree nominated seven new directors including Paul Hilal, a former Pershing Square executive whose activist fund Mantle Ridge threatened a proxy fight.

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In a recent interview with the Financial Times, Icahn acknowledged the increased influence of private equity investors, who implement corporate change away from public stock markets.

“In a way, what they do is salutary,” Icahn said. “In so many cases, they get rid of the management and put in a much better management team. In a good market, they’ve been successful.”

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