The New York Times’ Dealbook has a copy of Ramius Capital’s recent white paper, The case for activist strategies. The paper seeks to explain how activist investment strategies create shareholder value and improve corporate governance by resolving conflicts of interest between shareholders, directors and management.
Perhaps most interesting for Greenbackd readers is the paper’s discussion of the results of two recent comprehensive studies about the effectiveness of activist strategies:
The first, “Hedge Fund Activism, Corporate Governance and Firm Performance,” conducted by four university professors, analyzed nearly 800 activist events in the US from 2001 to 2006. The authors found that success or partial success was attained in nearly 2/3rds of the cases. The study highlighted that the target firm typically outperforms the market by 7% to 8% over a four-week period before and after announced activist campaigns by hedge funds. If this boost in performance was temporary and activist funds did little to generate value, the stock price would have reverted back over the course of the investment but the study concluded that this was not the case. The study also found that the highest market performance response to activist activities were when the stated objective was strategic in nature whether intending to sell the company, divest non-core assets, or refocus the business strategy. It also found that the effects of activist activities improved long term operational performance at target firms, demonstrated by ROE and ROA increases, while evidence of positive financial and corporate governance effects were observed in the form of increased dividend payouts and lowered CEO compensation. Another interesting conclusion was that hostile activism, which was found in roughly 30% of the cases, typically received more favorable market responses than non-hostile activism. The second, “Hedge Fund Activism” by April Klein, an associate professor at NYU, examined a sample group of 155 activist campaigns. Her conclusion was that in many cases the perceived threat of a proxy fight was sufficient for the activist to achieve its goal. This study reaffirmed many of the same conclusions as the previously mentioned study, including the abnormal stock returns surrounding the initial announcement. This study also found that the abnormal return of activist targets during the subsequent year was even greater, roughly 11%, confirming that activists generate returns significantly beyond the initial market reaction.
The paper concludes that both of the studies confirm that activism creates value, and can augment returns for traditional passive value investors. We think it confirms the value proposition of our approach to investing alongside activist investors in deep value situations.