Greenbackd

In an article on his Breakout Performance blog, Activist Investors Sidelined by Brutal Market, Dr. Eric Jackson gives some advice to the next generation of activist investors. Jackson is the founder of Ironfire Capital, an activist fund manager that uses “Internet-based social networking tools to gather information and amplify the impact of current focus campaigns,” and is perhaps best known for his campaign against Yahoo! Inc (NASDAQ:YHOO). Jackson believes that, to be successful, the next generation of activists must do the following:

Hedge, in order to preserve partner capital in the event of terrible years like 2008. The days of long-only are over.

Build a reputation for always doing right for shareholders (especially long-term holders). Some of the “quick fix” activists of the last five years never won the trust of large mutual funds and pension funds, who tend to be the biggest holders of stock of the large-cap companies. As a result, proxy contests failed to win over the support of this important constituency, for fear of how these activists would represent their interests properly.

Focus more on strategy and operations, less on single events. There will always be a place for activist investors to go after a company, advocating they sell a single division, or do a quick dividend to shareholders. However, these situations tend to be more prevalent in small-cap companies. Large-cap companies, by definition, have more complex problems and require more complex solutions. The next generation of top activists will understand this and have deep expertise in their firms on strategy and operations.

Use the tools of the Internet and social networking. In 2007, when I ran a successful activist campaign against Yahoo!, which resulted in unseating Terry Semel as CEO after a large “no” vote at the annual meeting, I owned 96 shares of Yahoo! However, I was able to get my message out to large and small shareholders via my blog, YouTube, wikis, Facebook and Twitter. More than calling attention to my ideas, these social networking tools allowed fellow shareholders to pledge support to my group and encouraged them to suggest additional ideas for how Yahoo! could improve. I was most surprised and pleased with how many existing Yahoo! employees participated. Yet, their interests were perfectly aligned with our groups: We were all stockholders of Yahoo! and wanted to see the stock price go up through needed changes, which the current board and management were not making. The next generation of large activist investors will be masters at using the Internet to conduct their campaigns.

Be more collaborative, less combative with target companies. It will always be necessary to run successful — sometimes nasty — proxy contests against entrenched boards and management. In my opinion, the Yahoo! board, for example, will never respond to a “nice guy” activist approach. It is so entrenched and disconnected from the opinions of shareholders that it would be impossible to reason with them. There’s a time to knock heads. However, some activists only knock heads. They only know how to hit one key on the piano. The next generation of activist investors will be able to play hard ball but tend to be much more collaborative with the board and the CEO — at least at the beginning, until reasonable dialog leads nowhere. Such an approach is also far less expensive than an “all-negative, all-the-time” approach.

Jackson makes an interesting point. A full blown proxy battle is prohibitively expensive for all but the very biggest stockholders (and even then it is an unappetizing prospect if it will materially reduce returns). If regulatory reform makes nominating directors a simpler and cheaper process – which the SEC’s proposed “proxy access” rules do – then the “tools of Internet and social networking” become potent weapons that act to level the playing field for the smaller investor. Such a change could create a new generation of web-savvy micro activists, who control only a handful of shares but understand how to use social networking media to influence boards, much like Jackson does with Ironfire Capital and his blog. But with a small capital base, how does Jackson make the campaign worth his while? In other words, how does he get paid?