Activist investors have gone quiet during the pandemic

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IF THE MERGER of Hewlett-Packard (HP) and Compaq Computer in 2002 was “a slow-motion collision of two garbage trucks”, Xerox’s $33bn unsolicited bid for HP this winter was more like two garbage trucks in a high-rev demolition derby. Both companies’ best days are long gone. Their original businesses, copying and printing, have been heading for the waste-paper bin. And HP was more than three times the size of Xerox, which therefore needed a huge pile of debt to finance the transaction. The hostile approach looked more like an act of desperation than of strategic thinking.

Egging them on from the sidelines was Carl Icahn, an 84-year-old activist investor who held stakes in both firms and initially reaped big rewards in the first quarter as their share prices rose. As a brilliant strategist, but with a tongue like a viper, he is an almost Dickensian caricature of the win-at-all-costs renegade. According to Mark Stevens, his biographer, he thinks some chief executives are “morons”, surviving because of a “reverse Darwinism”. He plunders corporate balance-sheets in order to return cash to shareholders, making sure he is the biggest beneficiary. He appears comfortable with his venomous reputation. “If you want a friend on Wall Street, get a dog” is one of his aphorisms.

On March 31st the unexpected happened. Xerox withdrew its bid, blaming the economic and financial disruption caused by the covid-19 crisis. Mr Icahn’s investments plummeted in value. The man himself has gone uncharacteristically quiet. So have many other activist investors. Insiders say activism has not been so subdued since the financial crisis of 2007-09.

It is predictable that the world’s business elite will cheer the retreat of boardroom scourges like Mr Icahn. With the covid-19 crisis causing economic misery and massive job losses, survival is the focus of most firms. Yet bosses should not be complacent. The activists will be back—and so should they be. As the pandemic eases, businesses will need more investor scrutiny than ever.

Corporate raiders have plenty of reasons to bide their time. Though hardly paragons of compassionate capitalism, they may fear a reputational hit if they are perceived as greedy while workers are being laid off. They may struggle to value their targets accurately, given the collapse in revenues. Their funds may face crisis-induced redemptions from investors, distracting their attention. Whatever the causes, some of the most prolific are settling with their adversaries rather than stepping up aggressions. A few days before the suspension of the Xerox-HP battle Mr Icahn gave up his fight reportedly aimed at removing the board of Occidental Petroleum, which he blames for approving a value-busting deal with Anadarko, a rival oil firm (he won the right to designate three directors instead). The same month Elliott Management cited market turmoil as the reason for ending its long resistance in France to the takeover by Capgemini, a consultancy, of its smaller rival Altran, in which it held shares. Activist Insight, a data gatherer, says the number of companies targeted by activists globally in the first quarter fell by 25% compared with the same period last year. It is expected to plummet further in coming months.

To be sure, some activist strategies would be tin-eared in the current climate. It would be foolish, for instance, to force a company to shrink its balance-sheet and return cash to shareholders when companies are desperate to conserve whatever resources they have. Hostile takeovers may be off the table, too. They would be a distraction that companies fighting for survival in the midst of a pandemic do not deserve, even if they would benefit from a friendly approach. Proxy campaigns to replace board members in this year’s annual general meetings (AGMs) also have their drawbacks: they are expensive; many AGMs will be held virtually because of social distancing; and shareholders have more pressing questions for executives than bickering over board membership. Activists will struggle to make their voices heard.

Corporate antivenin

Sensing a shift in mood, companies are strengthening their anti-activist defences. “Poison pills”—rights plans in which newly issued shares are offered to shareholders in order to dilute the stake of a dominant one after it surpasses a certain level—are surging. Some call them “anti-coronavirus pills”. Activist Insight counts 17 new ones in America in March alone, just one fewer than in the whole of 2019. Normally, large investors oppose such corporate sleights of hand, arguing that they can be used to shield managers from accountability to a company’s owners. But even ISS, one of the two big firms that advises shareholders how to vote in proxy contests, has softened its criticism. Provided that poison pills last less than a year and are justified by a sharp fall in a company’s share price, ISS says, they should be judged on a case-by-case basis. Anti-activist lawyers are encouraging clients to have a poison-pill strategy “on the shelf and ready to go”, as one puts it.

Such measures—and the trying circumstances—may deter activists for the time being. But not for ever. As lawyers at Schulte, Roth & Zabel, a pro-activist firm, note, some of them may be using the lull to build up their war chests. The market turmoil will expose those management teams whose poor performance has been disguised by a booming stockmarket. Activists may not have to wait long before opportunities arise.

Companies’ defensive manoeuvres may also come back to haunt them. Inevitably, some of Mr Icahn’s morons will have used the crisis to entrench themselves and avoid scrutiny, making them targets of attack once things get back to something akin to normal. Moreover, an easing of the pandemic is likely to lead to a surge in takeovers, as the strong gobble up the weak and government cash washes through the corporate world. In such circumstances, it will be all the more important for activists to hold executives to account. Without them cronyism and corporate sprawl could run rampant in the post-coronavirus world. ■

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