By David Benoit
Activist investors, a perennial nuisance for chief executives,
are becoming an existential threat.
Since January, they have helped push out the leaders of three
high-profile S&P 500 companies: insurance giant American
International Group Inc., railroad CSX Corp. and aerospace-parts
maker Arconic Inc. They are gunning for the CEOs at other companies
including Buffalo Wild Wings Inc. and Avon Products Inc.
Chief executives have long felt pressure from these investors,
who take stakes and push for changes to boost the stock, and
turnover at the top tends to increase after they show up. But
activists are increasingly asking for CEOs' heads at the outset of
campaigns, a new level of aggressiveness for a group already known
for its bold actions and impact on corporate America in recent
years.
So far in 2017, activists have started nine campaigns targeting
top management, the fastest pace on record, according to
FactSet.
The shift has been years in the making. After the financial
crisis, activists regularly won board seats and successfully pushed
for moves that can produce quick returns like breakups or share
buybacks. Many activists and analysts now question whether the easy
pickings are gone.
The answer for some is to pursue changes in operations, which
can be more of a slog and require new management.
"The activists are finding that just settling for board seats is
not all that productive," said Peter Michelsen, president of
CamberView Partners LLC, which advises some of the largest U.S.
companies on how to deal with activists. "They are having to get
more involved, including pushing for changes in management and
operations."
Some CEOs who have been targeted complain privately that
activists don't understand their businesses. "They've never built
anything in their life, except a spreadsheet," one said recently.
Others say boards should determine the CEO. They argue that
activists seek too much power given the size of their stakes, which
amount to as little as 1% in some cases.
The increased aggressiveness portends even nastier fights
between activists and their targets. It may also make
private-company executives more reluctant to tap public markets and
prompt them to employ stronger defenses when they do. Many
well-funded startups are already staying away, contributing to a
roughly one-third decline in the number of public companies since
1997, according to the University of Chicago's Center for Research
in Security Prices.
"Why would you want to go public if you can you lose control of
your company that easily because somebody makes a public statement
and the stock goes up," Jeffrey Ubben, founder of activist ValueAct
Capital Management LP, said at a conference last month. "You are
hijacked."
What happened at CSX Corp. could be cited as a case in
point.
Paul Hilal, formerly of William Ackman's Pershing Square Capital
Management LP, raised his own fund with the sole purpose of
replacing the railroad's CEO with Hunter Harrison. When The Wall
Street Journal reported the plan in January, CSX stock shot up
23%.
The market's endorsement helped Mr. Hilal, with 4.9% of CSX's
stock, push for board changes he argued were needed to support Mr.
Harrison and his efficiency strategy, known as precision
railroading.
CSX, already planning succession, agreed to hire Mr. Harrison
and name five new directors.
That wasn't even the most dramatic activist-fueled CEO change
this year.
Elliott Management Corp.'s fight with Klaus Kleinfeld at Arconic
resulted in the CEO's exit in April, though not for reasons either
side anticipated. In pushing for his ouster, Elliott called Mr.
Kleinfeld the worst CEO in the S&P 500. It cited missed targets
and what it characterized as his lavish spending -- like on ads
based on the Jetsons cartoon.
"CEOs do not hold the job by right," Elliott wrote in one letter
to Arconic, which was created when Alcoa broke into two companies.
"The Board must continually evaluate who should be running the
company."
Arconic defended Mr. Kleinfeld, saying he deserves credit for
building the company and breaking up Alcoa. Last month, Mr.
Kleinfeld sent a vaguely threatening note to Elliott's founder.
Arconic said at the time that Mr. Kleinfeld has stepped down by
mutual agreement. He hasn't commented since.
What happened at AIG is more typical. In late 2015, Carl Icahn
agitated for a breakup of the insurance company and a CEO change.
The sides settled, with Mr. Icahn getting a board seat and CEO
Peter Hancock pledging to improve performance. When AIG missed its
targets, Mr. Hancock resigned because, he said, he lacked
"wholehearted shareholder support."
At Avon Products, Barington Capital Group LP and NuOrion
Partners AG called for a CEO change after the beauty-products
seller reported a surprise loss this month, claiming a turnaround
is taking too long. The company said its plan is on track.
Even CEOs with strong overall returns aren't safe.
Sally Smith has led sports-bar chain Buffalo Wild Wings since
1996, presiding over rapid store growth and a roughly 1700% stock
return. The company still increased stock buybacks, added five new
directors and made other changes activist Marcato Capital
Management LP sought. Marcato nonetheless last month called on
Buffalo Wild Wings to fire Ms. Smith, saying the company has lost
its way amid slowing growth. Buffalo Wild Wings says she is the
right person for the job.
Write to David Benoit at david.benoit@wsj.com
(END) Dow Jones Newswires
May 16, 2017 08:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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