What are we looking for?
U.S. companies targeted by shareholder activist campaigns initiated this year, and are trading at attractive multiples relative to the S&P 500.
The screen
Over the past decade, global assets under management by activist hedge funds have grown exponentially, and so have the number of companies subject to their demands. This is particularly true in the United States, where activist funds have seen their assets grow to $146-billion (U.S.) across 301 companies, an increase from 278 in 2015.
Activists' goals and tactics vary greatly. Some may accumulate significant stakes in a company, attempting to gain control of the board through proxy contests, and spin off a more profitable division. Others may seek minority board representation, and propose executive management changes, returning excess cash to shareholders through stock buybacks and dividends or operational efficiencies.
Companies susceptible to activist investors broadly exhibit similar characteristics such as underperforming their peers in an expanding sector, low price-to-book (P/B) values or large amounts of idle cash. Activist funds apply proprietary research methods seeking companies with these traits, and address these issues by exercising their rights as shareholders, pressuring management to change business strategies, divest non-core assets or return excess cash to stockholders.
We screened for activism campaigns announced year-to-date, in which activists were known to hold more than 2 per cent of outstanding shares, the target's market cap is greater than $1-billion and trading at P/B and price-to-cash-flow ratios were less than 3 and 10, respectively.
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What did we find?
The screen uncovered five companies that meet our criteria. The table is broken down as follows:
- Announcement date: when the activist campaign was made public, either through a regulatory filing or through a management press release;
- Target: the company subject to shareholder demands;
- Activist: the activist fund that initiated the campaign;
- Stake at announcement: percentage of outstanding shares held by the activist.
Breaking out the activist demands column, "strategic direction" refers to mergers-and-acquisition-related activism. "Seek alternatives" suggests a review of operating and strategic plans focusing on production costs and capital expenditures, usually involving introducing operating efficiencies or financial restructuring. "Board related" usually means gaining board representation to influence future corporate strategy.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.