Activist Investors More Active Than Usual These Days

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Key Speakers At The Robin Hood Investors Summit
Peter Foley/Bloomberg/Getty Images Activist investor Carl Icahn was particularly vocal in 2014.
The dictionary says an activist is a person who "emphasizes direct vigorous action especially in support of or opposition to one side of a controversial issue."

A corporate activist essentially fits the same definition, with the distinction that he or she has a great deal of money behind them, and the issues that grip them have to do with the management of publicly traded companies. In 2014, these flag-wavers have had more success than usual changing the landscape at a number of famous businesses. For better or worse, this is having a big impact on the destinies of those companies.

An Apple a Day...

At any given point, there are plenty of corporate gadflies buzzing for change at companies in which they own stakes. The difference last year was that a disproportionate number of them were successful.

This past October, activist investor Starboard Value managed to force the replacement of the entire board of Darden Restaurants (DRI), operators of the Olive Garden and LongHorn Steakhouse restaurant chains, among others. This, despite owning a mere 9 percent stake in the company.

That's an overwhelming victory, but of course all a determined investor needs to do is win the majority of seats on a company board in order to push through its policies. That was the case with Casablanca Capital, which last summer managed to get six of its chosen candidates elected to the 11-member board of mining and natural resources concern Cliffs Natural Resources (CLF).

Meanwhile, notorious corporate tree-shaker Carl Icahn managed to get his preferred candidate, John Tague, installed at troubled car rental giant Hertz Global Holdings (HTZ) late last year. This followed the resignation of CEO Mark Frissora after Icahn's fellow Hertz activist shareholder Fir Tree Partners publicly criticized Frissora's leadership.

Icahn had a particularly good 2014. In addition to the Hertz victory, his company also managed to agitate for a larger share buyback at Apple (AAPL), even though the tech giant's $90 billion repurchase plan fell short of the $150 billion the investor was demanding. Icahn's efforts also led to eBay (EBAY) agreeing to spin off its phenomenally successful PayPal e-payments subsidiary.

Active Involvement

Part of what made these professional corporate irritants so successful last year was simple volume. According to data compiled by FactSet's SharkWatch, nearly 150 activist campaigns were launched in the first half of 2014 -- the highest number since last decade's financial crisis.

What also helped was the rising stock market, which made perceived underperformance by known companies stick out prominently. In the year prior to Starboard's revelation that it had a stake in Darden Restaurants, the latter company's stock price rose less than 4 percent. The Dow Jones Industrials Index ^DJI), meanwhile, advanced by just under 28 percent.

Investors were more than eager to fund activist investor campaigns to reverse these imbalances. Last May alone, the hedge funds that serve as vehicles for the activists attracted $4 billion in new allocations.

That's plenty of dosh to fight such battles. By comparison, the total market capitalization of Cliffs Natural Resources currently stands at just under $1.2 billion.

Perhaps Passive Is Better

Yet for all the storm and fury surrounding activist investing, the changes that the Carl Icahns of the world agitate for aren't necessarily wins for shareholders in the affected companies.

For instance, eBay's shares have gained only 8 percent since Icahn Partners disclosed its stake; meanwhile, the Nasdaq Composite Index (^IXIC) that the stock is a part of rose by 15 percent over that time. Those figures for Hertz vs. the Dow Jones are even starker -- down 7 percent and up 18 percent, respectively.

Since Casablanca triumphed in the Cliffs boardroom shake-up, the miner's stock price has dropped by 56 percent while the Dow has added 4 percent.

Of course, not all activist targets are created equal. Apple has risen at nearly double the rate of the Nasdaq Composite since Icahn's stake was made public. But much of that success is more likely due to the company's solid fundamentals and the enduring popularity of its goods, rather than the investor's moves.

So at the end of the day, activist investors are good at grabbing headlines and at pointing out the perceived shortcomings of management and strategy in the companies they target. This doesn't necessarily mean that the stock prices of the affected firms will benefit, however, so we should be cautious when considering an investment in their stocks.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Apple and eBay, and owns shares of Apple, Cliffs Natural Resources, eBay and Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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