Underperformers and companies with assets to spin off are particularly vulnerable to activist campaigns, says Moody’s
As companies sit on an unprecedented amount of cash in 2014, an unprecedented number of activist investors will tell them what to do with it.
The number of activist investor campaigns rose 5 percent last year and will likely continue to rise this year as companies’ cash holdings trigger a quest for quick shareholder profit, according to a study by Moody’s Investors Service.
Activist hedge funds and investment advisers launched 220 campaigns last year through proxy contests and public announcements, an increase from 209 in 2012 and 179 in 2011, the ratings agency says in its 2014 shareholder activism report.
‘The chief cause of the increase in shareholder activism is the lure of tremendous piles of cash sitting on US non-financial company balance sheets,’ the report notes. ‘Companies also continue to have access to inexpensive debt, which makes it easier to leverage balance sheets to fund share buybacks, special dividends and other shareholder rewards.’
According to estimates by S&P Capital IQ’s Global Market Intelligence unit, companies in the S&P 500 likely set a sixth consecutive quarterly record in terms of cash holdings in the fourth quarter of 2013, with $1.29 tn in cash.
Tech companies are the main target of shareholder activists, followed by companies in the healthcare, energy and retail sectors, Moody’s says. About 60 percent of all activist campaigns launched last year targeted companies from one of those sectors.
Chris Plath, Moody’s vice president and senior analyst, says in a press statement that activist investors are increasingly likely to target companies that are underperforming and those in a position to carry out some form of spin-off.
‘Among the most vulnerable are companies with low valuations resulting from lagging performance or those that have valuable assets that can be sold off or spun off into a separate entity,’ he says. ‘With their large cash balances, minimal debt levels and small – if any – dividend payments, technology companies will continue to be targeted by activist investors calling for more aggressive capital returns.’
The Moody’s report also notes that shareholder activism can damage companies’ credit quality by prompting hasty share buybacks or dividend payments. It says some activist investors have continued to pressure boards even after they have taken steps to address the concerns that triggered the initial campaign.
