Activist investors often don’t do well because they tend to misunderstand how their targets work, according to a study in the Yale Law Journal.
It found that “activists have a higher risk of mistargeting—mistakenly shaking things up at firms that only appear to be under-performing.”
The activists do not see the whole picture about their target companies, as they are focused on the short term and thus make a lot of mistakes with negative consequences, in the estimation of the law journal entry’s authors, Zohar Goshen, a Columbia Law School professor, and Reilly S. Steel, a lawyer who is pursuing a political science doctorate at Princeton University.
The telling statistic: The Bloomberg Activist Hedge Fund index returned 132% from inception in 2013 to the end of 2022. The S&P 500 did better during the period, up 145%. Ongoing statistical evidence for how often activists get what they want is harder to come by, and the Yale report did not offer that. One study, published by Harvard Law School in 2020, stated that in 2017, activists had a 34% success rate.
The Yale study gave several examples of activist mistargeting, including Bill Ackman’s failed attempt to revamp perennially ailing department store chain J.C. Penney. The hedge fund chief installed a CEO who did away with discounts and clearance sales, promising “everyday low pricing.” Customers did not cotton to this approach, and revenue dropped. Ackman’s firm Pershing Square admitted defeat and sold its stake at a loss in 2013.
J.C. Penney has continued to have a rough time, including a bankruptcy filing and many store closings, and since 2020 has been owned by mall landlords Simon Property Group and Brookfield Asset Management. Although the owners do not report the much-shrunken retailer’s performance, analysts say it appears to be making some headway.
Other illustrations the report cited included when Carl Icahn pushed Netflix to sell itself, but the company resisted—and has flourished since. Another was Dan Loeb’s Third Point, which tried to make Sony break itself up by separating its electronics and entertainment. Same sorry result.
Of course, there are numerous examples of activists’ success that the report did not cite. Consider hedge firm Engine No. 1, which won a proxy fight to seat three environmental-minded directors on ExxonMobil’s board. The hedge fund did so by enlisting large pension programs—notably the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the New York State Common Retirement Fund—and others, such as Vanguard Group, to win the contest. Since then, the energy giant has committed itself to efforts to reduce greenhouse gas emissions.
In 2006, Trian Partners forced fast-food chain Wendy’s to spin off its Tim Hortons donut unit. Trian argues now that the spin-off permitted Wendy’s to focus more on its core operations and on competing with rivals like Burger King and McDonald’s.