From Deal Journal:
The best advice for investors in companies that are targeted by activist shareholders like Carl Icahn and Nelson Peltz may be this: wait for the stock to pop and then head for the hills.
Harvard has a new study out that examines the performance of shares in companies targeted by activists. (Read about it in this Wall Street Journal article today.) The upshot: the modern day corporate raiders are only going to make other shareholders money if their goal is to get the target company sold — and they succeed.
Why? It seems that the skill of activists like Icahn, Peltz and William Ackman is in judging the value of companies in a sale, and not in figuring out how to improve companies’ operations and profits. Says Robin Greenwood, the Harvard assistant professor who conducted the study: “They’re investors. They’re not operating guys.” Icahn’s failed bid to shake up Motorola, and his only-somewhat-successful campaign at Time Warner are cases in point. (To be fair, Icahn reaped profits for his investors off the Time Warner campaign, and Greenwood says Icahn is among a group of activists that are a cut above the rest.)
The study’s findings go against the commonly held belief that companies benefit from activist attention. That is why shares initially tend to rise when these investors come to town. If the study’s conclusions are correct, in most cases those stocks won’t stay up for long. Especially now that there are few M&A suitors to bail any investors out.
Interestingly, the HBS abstract of the study also calls into question the utility of shareholder activism by standard institutional investors:
Are hedge funds better than large institutional investors at identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover? Are they best equipped to monitor management? While blockholding by large institutional investors—pension funds and mutual fund investment companies—is widespread, there is virtually no evidence that these institutional shareholders are effective monitors of management or that their presence in the capital structure increases firm value. When institutional blockholders make formal demands on management, there is no evidence of their success. This working paper outlines the advantages and limits of hedge funds to manage these tasks. Greenwood and Schor's characterization differs markedly from previous work on investor activism, which tends to attribute high announcement returns to improvements in operational performance.