Activist investors busy over holiday weekend

There were a couple of stories during the Labor Day weekend about activist investors and their new roles in asking for corporations to make changes.

Here’s the story from the Wall Street Journal about Microsoft allowing an activist to join the board:

Microsoft Corp. is giving a board seat to an activist investor for the first time, a landmark move that comes only a week after Chief Executive Steve Ballmer disclosed he would step aside.

Announced just ahead of the Labor Day weekend, Microsoft said it would appoint a director from ValueAct Capital Management LP early next year. It would be the first time the company had ever appointed a director not solely at its discretion.

Mr. Ballmer and other Microsoft officials have said ValueAct’s pressure played no role in last week’s surprise announcement about his retirement. A ValueAct official has said the same thing in at least one private conversation, according to a person familiar with the matter.

Still, the decision to add an investor who owns less than 1% of the company shows the pressure that Microsoft faces. The company has faced widespread criticism for missing several waves of consumer technology, from mobile devices to Internet search.

Longtime Microsoft observers have remained puzzled by the motivations and timing of Mr. Ballmer’s announcement, coming shortly after a reorganization in July that appeared to reinforce his central influence at the company.

In conversations with directors in the past week, some Microsoft investors questioned whether Mr. Ballmer’s retirement was voluntary, and some pressed the board about the role ValueAct may have played, according to a person familiar with those conversations.

The New York Times wrote a broader story about the role of activist investors and chronicling their activities over the past couple of decades:

Once considered purveyors of a niche investment strategy, so-called activists like ValueAct have leapt onto the big stage as hedge funds wage bolder battles against ever-bigger corporate targets like Apple, leaving executives wondering if they could be next.

Unlike their predecessors who often pursued aggressive takeovers for quick gains, this latest generation of activists are largely agitating for some sort of long-term change — a shift in business strategy, a different use of cash, even a complete overhaul of a company’s board.

Robust returns in recent years and new money racing into these funds at a rate not seen in seven years have given activist investors — as defined by industry experts like the firm Hedge Fund Research — a war chest of $84 billion, more than double the assets they oversaw just four years ago. That money has fueled activists’ ambitions, with mixed results.

Over the last two years, activists have taken aim at a number of blue-chip companies, like Procter & Gamble and PepsiCo. And one of the best-known players, Daniel S. Loeb, has even gone abroad, pushing for change at Sony, an icon of Japanese business.

Some battles have led to big victories. This spring, the hedge fund TPG-Axon successfully pushed for the ouster of SandRidge Energy’s chief executive, Tom Ward.

But others have led to tough losses: the billionaire William A. Ackman, who lost hundreds of millions of dollars in investor money in his campaign against Target, resigned from the board of J. C. Penney two weeks ago after unsuccessfully calling for the removal of its chairman; he sold his stake at a loss of nearly $500 million. And Mr. Loeb was unsuccessful in persuading Sony to partly spin off its huge entertainment arm.

What isn’t readily apparent is if these activists are helping shareholders or promoting a broader good. Their success at increasing stock prices is mixed, according to the Times story. So it seems for every activist investor who succeeds in changing a company’s outlook, there are more who are simply agitating for not much change. What’s certain is that executives are taking notice.

From the Times again:

Corporate executives are taking activist investors more seriously than ever.

Companies monitor their shares for signs of an activist and are quick to hire advisers when an insurgent investor emerges. And more than ever, they are willing to offer a compromise — a board seat or two, an exploration of asset sales — to head off an all-out battle for control.

“Companies are trying to engage with the activists early, below the radar, so that things don’t have to bubble up to the surface and become public, which is extremely disruptive to the company,” said Damien Park, the founder of Hedge Fund Solutions, which consults with companies and hedge funds on activism.

Years of legal battles have also whittled away traditional corporate defenses against activists. Many companies now elect their boards annually, as opposed to “staggering” director elections every year, making it easier for dissidents to gain control.

What good they do with that control will be determined as they continue to become more sophisticated in what they ask for.