Activists can win their battles but lose out in war for reputation
The stock market is at new highs, but, ironically, shareholder activism also appears to be be peaking. High profile activist campaigns involve iconic American brands like Hess, Apple and Dell and smaller companies like Herbalife.
Media love a good fight, so, when hedge funds come out swinging, the newswires light up. This reality is a double edge sword for hedge funds. On one hand, it is usually easy for the activist to corner a corporate target. Typically, the corporation is a sitting duck for criticism and is predictable in its response. However, the media machine must be fed and sometimes it can bite the activist hand that feeds it juicy, controversial stories.
Recently, hedge funds’ tactics have come into question for distorting the information balance that creates an efficient market for a company’s stock. I’d be curious to see a large sample of how stocks perform after appearing in activists’ crosshairs. Stephen Taub, writing for Institutional Investor’s Alpha looks at some recent examples and concludes that “the so-called smart money set may be able to influence a stock’s performance or direction for a day or two or week. But, over a longer period of time the company’s fundamentals…determine a stock’s direction.”
A potentially more ominous story in the New York Times looks at the actors in the Herbalife contest. “The arrival of the hedge fund billionaires — William A. Ackman, Daniel S. Loeb and Carl C. Icahn — spawned a media circus. And at times, some investors acted as if they were the stars of a reality-TV show,” commented the Deal Professor column. The column goes on to say that after playing their cards, Greenlight Capital and Third Point took their winnings and went home, but Pershing Square and Carl Icahn remain at the table engaged in a high-stakes, heads-up death match over Herbalife. The story suggests that things have gotten personal between the two hedge funds and hints that the apparent stand off is no longer about Herbalife, but about ego.
This could be raising the eyebrows of investors and should be a significant concern to Pershing Square and Icahn. If it begins to appear that either remains involved in Herbalife for any reason other than its investment thesis, it could be extremely damaging. Above all, a hedge fund needs to be perceived as rational and must apply an objective, analytic investment process to its strategy in order to deliver on the “hedge fund promise” (a fund’s ability to use all the arrows in Wall Street’s quiver without taking on significantly more risk than the market as a whole to deliver alpha).
This episode illustrates a fact that most activist hedge funds don’t fully grasp: executing the worlds best media program in connection with a shareholder campaign is not a strategy that builds your reputation. It is a tactic that supports a single investment decision. Think about the New York Yankees. Baseball is simple, right? “Sometimes you win, sometimes you lose, sometime it rains.” But the what the Yankees stand for is far bigger than their record. Activists cannot pin their reputation solely to their record because sometimes you lose and sometimes it rains.
Firms must define the bigger picture, the context in which they operate and use the media to tell that story to LPs, prospective investors and corporations (after all, a fund’s reputation alone can be sufficient to deter corporate resistance). This gives the media a larger narrative with which to work and can define the intricacy and nuance of the hedge fund’s game much more than the scorecard. Funds that don’t look inward to find what makes them tick can find themselves winning many battles, but losing in the larger fight to establish and preserve a reputation around which investors want to congregate.