A New Era for US Shareholder Activism?
Dr. Jan-Carl Plagge, Head of Applied Research
Amid the strong moves in equity markets that followed the election of Donald Trump as US President, a group of stocks stood out.
Public companies with a major activist hedge fund as a significant stakeholder, as measured by the STOXX® Activist Equal Weight Index, rose 7.8% between the US elections on Nov. 8 and Dec. 30. That compares with a 5.2% gain for the STOXX® USA Total Market Index.
Sure, activists’ targets tend to have a value tilt, and value stocks have done very well since the election. But could it also be that a new, more positive era for shareholder activism has begun under President Donald Trump, given his pledges of deregulation?
Activism in asset management refers to the work of investors to pressure changes to corporate strategy with the objective of seeking greater boardroom governance or extracting higher value from the investment. Within the STOXX® Activist Indices, a large portion of the campaigns recorded refer to the latter.
Campaigns in recent years
A greater climate of corporate accountability helped activism flourish under the presidency of Barack Obama. The aftermath of the global financial crisis saw increased regulation in terms of governance, which stimulated the fiduciary role of investment funds as stewards of money. According to FactSet, activist campaigns against US companies grew every year between 2010 and 20151.
For an article looking at the outperformance of the STOXX® Activist Index between 2007 and 2015, please click here.
Activists may get freer rein
John C. Coffee Jr., director of the Center on Corporate Governance at Columbia Law School, recently wrote that the new US government may pave the way for reduced public enforcement and downsizing of corporate compliance efforts to the benefit of “the judgment of the entrepreneurs in the corporation’s profit centers.”2
“I see very little prospect that activists will be regulated more severely in the Trump administration,” Coffee said in an interview with PULSE ONLINE. “And, in time, they may feel that they can push a number of companies towards higher leverage and higher risk-taking.”
Take banking regulation. Trump has pledged to dismantle Dodd-Frank (full name: Dodd–Frank Wall Street Reform and Consumer Protection Act), the law passed in 2010 to oversee the financial-services industry more tightly and avoid a repetition of the 2008 debt crisis. Trump’s campaign web site called Dodd-Frank a “sprawling and complex piece of legislation that has unleashed hundreds of new rules and several new bureaucratic agencies.”
If banks have more leeway to deploy capital, the financing of mergers and acquisitions is likely to become a channel for that. With US interest rates still at very low levels relative to history, companies may be encouraged to embark on takeovers.
But the new administration has higher and broader ambitions to unwind regulation. The presidency transition platform called regulatory reform the ‘cornerstone of the Trump Administration’ and has pledged to impose a temporary moratorium on all new regulation.
These intentions were best made clear when Trump on Dec. 21 appointed Carl Icahn, one of America’s most iconic activist investors and so-called corporate raiders, as Special Advisor to the President on Regulatory Reform.
The STOXX Activist Indices capture the performance of US public companies in which the top activist hedge funds (as defined by FactSet’s SharkWatch 50 list) have a significant investment stake.
The index has filters for market capitalization and trading liquidity. Companies where the related agitator holds at least 7% of the market capitalization at the time of the announcement, or an absolute value of at least USD 500 million, are selected for the index.
A new year for deals?
Deregulation may pave the way for activism insofar as shareholders see new windows of opportunity for corporate change where it was hitherto prescribed. The current background of rising equity prices and low interest rates is ideal for activist deals. The new year may bring exciting stories in restructuring, mergers and acquisitions.
1 Shareholder Activism and Target Company Performance, SharkRepellent.net, Aug. 31, 2016.
2 Shareholder Activism in the Era of Trump: What Strategy Works?, John C. Coffee, Jr., The CLS Blue Sky Blog, Nov. 21, 2016.