Activist investors search for new takeover targets

Where did Yahoo go wrong?

Activist investors' appetites have gotten bigger in recent years, and it's sending some of them looking for change in the management of public companies.

A toppy market has big shareholders backing activists' longer-term initiatives, such as forcing spinouts, strategy shuffles and executive replacements. After years of getting easy dividends and buybacks from boards eager to avoid a fracas, cheap money driven by central bank policies has forced some hedge fund investors to shift strategies. And the market has taken note.

"They're engaging more with the activists," said PwC governance insights center leader Paula Loop. "They're willing to listen to them."

Activists' elevated profiles are allowing them to take on bigger targets, and to push for more complex deals. Sometimes they're doing it on the back of a smaller stake in the target company than would have been typical in previous years.

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Many other large corporations have been chased by big activists for a bigger payout sooner in the form of a dividend or buyback. But a lawyer who represents hedge funds that pick billion-dollar battles says the activist strategy of nudging boards toward simple payouts — largely facilitated by cheap money easily accessed by corporations with solid ratings — may be about to go the way of the dodo.

"I think that's not a trend that's going to continue forever," said the attorney, Steven Wolosky.

Many activist targets for buybacks and dividends have already been squeezed for cash, and it's not clear whether a flurry of post-crisis payouts can keep growing. Data compiled by Factset show that the $166.3 billion spent on buybacks in the first quarter of 2016 is the most since the third quarter of 2007, when companies spent $178.5 billion.

Activist funds are employing new strategies to boost returns, including forcing executives out, seeking M&A — be it an outright sale or a spinoff. The latest activist target is Buffalo Wild Wings. After activist Marcato Capital Management revealed a stake in the company via a 13D filing, the stock jumped several percentage points.

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An activist campaign centered on such a strategy can take many forms, but it is virtually certain to take longer to pay off. In the case of Yahoo, Jeff Smith's Starboard Value disclosed a stake in the tech company more than a year ago, and Yahoo's core business was sold to Verizon in a $4.8 billion deal just this week.

When it comes to an activist campaign pushing for M&A or management change, investors should expect to spend a year or longer waiting for a deal to come, Wolosky said.

In early 2014, activist Carl Icahn kicked off a board battle with eBay, seeking to have the online auction house spin off Paypal. Months later, he'd give up that fight, but not his investment. He held onto his eBay stock.

Despite being beaten back by eBay's management temporarily, Icahn would ultimately get his way, and then some. The company decided the following year to spin out Paypal, and at that point the savvy fund manager decided to shift bets. With his option to take eBay or Paypal stock, Icahn took the latter. And eBay's board was likely relieved to see an agitator who once said he had "never seen worse corporate governance than eBay" moving onto another company. Today, Icahn still owns Paypal shares.

Other activist campaigns don't amount to a profit, or even to change. After starting 2016 saying he believed Macy's was a candidate for a private equity deal and a breakup of its brand from its real estate, in the form of a REIT, David Einhorn spent months watching the stock decline. In his letter to investors on Wednesday, Einhorn revealed that he gave up the ghost, and sold the stock at a loss.

Wolosky thinks spinoffs driven by activists are going to become increasingly prevalent, although few activists today are using language as pointed as the salty New York native's.

"That stigma has gone away," he said, and corporate boards, institutional investors and others have increasingly come around to the idea that they can, and should, work with the same activists they might have shunned years before.