ACTIVISM REPORT

Contested Elections Research

June 2015

Beware of Activists Bearing Formulas: Activist Investors

and the Success of Financial Engineering

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

Over the past several years, activist investors have grown considerably in
prominence and firepower. Since 2010, 15% of the members of the S&P 500 have
been the subject of an activism campaign,1 and in 2014, more activists targeted
more companies than ever before.2 Investors, attracted by the promise of strong
returns from this burgeoning asset class, have rushed in to the sector. During 2014,
activist stock holdings increased to nearly $250 billion,3 and there is even more dry
powder available for future campaigns.4 Despite its apparent explosion in popularity,
however, activism is hardly a new strategy. Instead, its basic tenets have shifted over
the years, to the point where there is now a fairly well-defined taxonomy5 of
activism strategies. Of these, financial engineering has been one of the most
popular.
According to Activist Insight, there have been 2,426 activist investments in North
America since 2010, more than a quarter of which have been concerned with some
kind of financial engineering. In the prototypical situation, an activist will take a
position in an underperforming company and argue that it is undervalued. This value
may be unlocked through a transaction that monetizes a portion of the companys
assets, typically via a divestiture or spin-off of a business unit. More exotic
transactions, such as a sale-leaseback of a companys real estate assets or a
conversion from a C-corporation to a master limited partnership (MLP) or real estate
investment trust (REIT), are also possible.
At the other end of the spectrum, companies that have been performing well have
also found themselves in activists crosshairs. In the years following the financial
crisis, corporations had been hoarding tremendous piles of cash, making them
fodder for activists to enter the scene and advocate for that cash to be put to more

"An Investor Calls." The Economist. The Economist, 07 Feb. 2015. Web. 05 June 2015. Available at:
http://www.economist.com/news/briefing/21642175-sometimes-ill-mannered-speculative-and-wrong-activistsare-rampant-they-will-change-american
2
Black, Josh. "Editor's Foreword." Activist Investing: An Annual Review of Trends in Shareholder Activism (2015).
Available at: http://www.shareholderforum.com/access/Library/20150130_ActivistInsight-SRZ.pdf
3 Id.
4Zagger, Zachary. "M&A Boom To Continue In 2015 With Deal-Friendly Economy." Law360. 05 June 2015.
Available at: http://www.law360.com/articles/599657/m-a-boom-to-continue-in-2015-with-deal-friendlyeconomy
5 Levin, Michael. "A Taxonomy of Activist Investing Strategies." The Activist Investor. 05 June 2015. Available at:
http://www.theactivistinvestor.com/The_Activist_Investor/Blog/Entries/2014/6/17_A_Taxonomy_of_Activist_Stra
tegies.html

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ACTIVISM REPORT
efficient use, such as via share buybacks or acquisitions.6 The flow of cheap money
enabled by ZIRP has also fueled this phenomenon.
But amidst the proliferation of activist investing in general and its sub-strategy of
financial engineering in particular, few have stopped to ask what is, to us, an obvious
question: Do these financial engineering transactions share buybacks, divestitures,
spin-offs, and acquisitions actually create shareholder value like activists claim?
In many respects, there is an unbridgeable divide between activists and issuers.
Activists will claim that issuers and their management teams are too self-serving and
resistant to change; issuers will claim that activists have only short-term goals in
mind, and are hardly concerned with long-term shareholder value. However, we
believe that by looking at the data objectively, we can begin to bridge the divide. We
have examined a sample set of approximately 100 cases of activism campaigns
involving financial engineering over five years. Rather than having to rely on rhetoric,
our data-driven approach to this question can help determine whether claims of
unlocking shareholder value are just hot air, or whether activism truly does what it
says on the tin.

Contested Elections Research

June 2015

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

A Background on Financial Engineering

Financial engineering is somewhat of a pejorative term that refers to a sub-set of
activist investing that encompasses a range of strategies. There are two activist
investing taxonomies that we can use. One, posited by Michael Levin, includes
categories of social activism, governance activism, operational activism, and
financial activism.7 The second, used by Activist Insight, includes board-related
activism, balance sheet activism, business strategy activism, M&A activism, and
governance activism.
Balance Sheet
Activism

Board Related
Activism

Business
Strategy

M&A Activism

Governance
Activism

Share
Repurchase

Gain Board
Representation

Operational
Efficiency

Merger

Compensation

Dividends

Eliminate
Staggered
Board

REIT/MLP
Conversion

Acquisition/
Divestiture

Bylaw
Amendments

Recapitalization

Separate
Chair/CEO

Cost-Cutting

Takeover

Poison Pill

Leverage

Spin-Off

Source: Activist Insight

Plath, Chris. Shareholder Activism: Impact on North American Corporate Sectors. Moodys Investor Service. 05
June 2015. Available at: http://www.law.harvard.edu/programs/corp_gov/activist-interventions-roundtable-2014materials/2014_03_shareholder-activism-impact-on-na-corporates.pdf
7 Levin, Michael. "A Taxonomy of Activist Investing Strategies." The Activist Investor. 05 June 2015. Available at:
http://www.theactivistinvestor.com/The_Activist_Investor/Blog/Entries/2014/6/17_A_Taxonomy_of_Activist_Stra
tegies.html

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Broadly speaking, financial engineering activism represents a cross between purely
financial or balance sheet activism, business strategy or operational activism, and
M&A activism. Specifically, financial engineering activism deals with activist
campaigns where the primary goal of the shareholder is to pursue one of the
following:

Dividends

Share
repurchases

Acquisitions

Divestitures

Capital
restructuring
(e.g., increasing
leverage)
Spin-offs

REIT/MLP
conversion

Pursue sale to
third party (e.g.,
private equity
buyout)

Mergers

Contested Elections Research

June 2015

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

Overall, financial engineering strategies are used in approximately half of all North
American activism campaigns. The reasons for the popularity of financial
engineering strategies within activism are manifold, but boil down to several factors
at both the macro and micro levels.

Activism Campaign Strategies

Balance Sheet Activism
Board Related Activism
Business Strategy
M&A Activism
Other
Other Governance
Remuneration

Source: Activist Insight

First, the return of a robust M&A market following the financial crisis has meant that
there are more opportunities available for activists to push for strategic acquisitions,
divestitures, or mergers.8
Second, many corporations have large piles of cash on hand that need to be put to
work.9 With companies still somewhat reluctant to invest heavily in R&D and organic
growth, activists have sought to use that cash to fuel buybacks, dividends, or
8

Black, Josh. "Editor's Foreword." Activist Investing: An Annual Review of Trends in Shareholder Activism (2015).
Plath, Chris. Shareholder Activism: Impact on North American Corporate Sectors. Moodys Investor Service. 05
June 2015. Available at: http://www.law.harvard.edu/programs/corp_gov/activist-interventions-roundtable-2014materials/2014_03_shareholder-activism-impact-on-na-corporates.pdf
9

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ACTIVISM REPORT
strategic acquisitions. Perhaps not surprisingly, this feature has made the cash-rich
technology sector a notable activist hunting ground.10
Third, the relative success of spin-off strategies have emboldened other activists to
try to replicate these and other financial engineering campaigns at a broader array
of companies. A report by Deloitte and Edge Consulting highlights the fact that the
average TSR of parent companies one year after a spin-off is approximately 14%,
besting the S&P 500 over the same time period.11 This figure rises to nearly 30% two
years after the break-up.12

Contested Elections Research

June 2015

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

With respect to real estate-related activism, such as REIT conversions and saleleasebacks, much of the popularity has been driven by the recovery of the real estate
market as a whole, which has restored lofty funds from operations (FFO) multiples
that provide for attractive monetization opportunities.13 And, the acceptance of
REITs as total-return vehicle for the masses14 has meant that REIT conversions are
gaining traction among activists looking to unlock value through more exotic means.
Additionally, there are numerous other secondary factors such as the relative
strength of the dollar and tax reforms relating to inversions that have further
driven a rush of M&A activity, often at the behest of activists.
At the micro level, it is important to keep in mind that while many activist hedge
fund managers may lack the sort of operational experience that can form the basis
for a campaign centered on business strategy, they often find financial engineering
well within their zone of competency.15 Portfolio managers are far more comfortable
building financial models that show the accretive impact of spin-offs than they would
be, for example, waiting tables to get a better understanding of the operating side
of the business.16
A recent study by FTI Consulting found that nearly 90% of those polled expected
financial engineering activism in general to continue to increase,17 and a report by
Alliance Advisors suggests that, over the past few years, capital allocation (i.e., share
buybacks and dividends) and restructuring (i.e., asset sales and spin-offs) have
become the key issues in activism campaigns.18 But while the fundamental
10

Id.

11Black,

Will. "Value of Companies Globally Undertaking Spinoffs to Hit US $664 Billion for 2014." Deloitte LLP. 05
June 2015. Available at: http://www2.deloitte.com/uk/en/pages/press-releases/articles/value-of-companiesglobally-undertaking-spinoffs-to-increase.html
12
Id.
13 Black, Josh. "Editor's Foreword." Activist Investing: An Annual Review of Trends in Shareholder Activism (2015).
14 Buller, Steven. REIT Stocks: An Underutilized Portfolio Diversifier. Fidelity Investments. 05 June 2015. Available
at: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/REIT%20Stocks%20%20An%20Underutilized%20Portfolio%20Diversifier_Fidelity.pdf
15 Klingsberg, Ethan. Risks and Opportunities of Hedge Fund Activism. Cleary Gottlied Steen & Hamilton. 05 June
2015. Available at: http://www.clearymawatch.com/wp-content/uploads/sites/506/2015/04/1505Klingsberg.pdf
16
Giammona, Craig. Olive Gardens Hedge Fund Bosses Waited Tables to Aid Turnaround. Bloomberg LP. 05
June 2015. Available at: http://www.bloomberg.com/news/articles/2015-06-01/olive-garden-s-hedge-fundbosses-waited-tables-to-aid-turnaround
17 Balet, Steven. The Shareholder Activists View: M&A Activism to Rise in 2014. FTI Consulting. 05 June 2015.
Available at: http://www.fticonsulting.com/global2/media/collateral/united-states/shareholder-activism-views2014.pdf
18 Westcott, Shirley. Dealing with Evolving Activist Investor Strategies. Alliance Advisors, LLC. 05 June 2015.
Available at: http://allianceadvisorsllc.com/wp-content/uploads/2014/03/Alliance-Advisors-March-12-2014Webinar-Deck.pdf

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conditions at the macro and micro levels support this kind of activism, many of these
recent reports and analyses have ignored a more fundamental question: Does
financial engineering actually create long-term value for shareholders, as activists
might claim?
Unlocking Value: Reality or Rhetoric?
To answer this question, we used Activist Insights comprehensive database to
derive a sample set of 100 discrete instances over the past ten years where financial
engineering was one of the primary objectives of the activist, and where the activist
was successful in achieving this objective. We excluded financial engineering
situations where the corporate parent company did not survive (i.e., takeovers and
private equity buy-outs) as well as situations where the focus was on securing
dividends. We initially included situations in which the activist pushed for a merger
in our sample set, but ultimately excluded these situations from our analysis because
there were not enough discrete instances to make the data meaningful. We were
left we four broad activist objectives acquisitions, share buybacks, divestitures, and
spin-offs.

Contested Elections Research

June 2015

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

Buybacks were the most common objective of activists in our sample set,
representing about half of all campaigns. Acquisitions were the least common of the
four objectives.

Number of Campaigns

Acquisitions

Buybacks

Divestitures

Spin-Offs

Our data also revealed some interesting features about the activists themselves. As
one might expect, the big names dominated our list, with JANA Partners, Starboard
Value, and Blue Harbour occupying the top three slots in terms of number of
financial engineering campaigns. They were followed by other heavyweights such as
Relational Investors, Elliott Management, Third Point, Pershing Square, and Carl
Icahn. But the frequency of campaigns had little to do with performance, with some
of the most active players specifically Third Point and Elliott also among the
worst-performing.

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ACTIVISM REPORT
To assess whether financial engineering campaigns have actually created
shareholder value, we focused on two primary metrics: TSR and EPS. We measured
TSR over three primary time periods: during the 60-day window surrounding an
announcement, one year after an announcement, and from the announcement to
the present. With respect to EPS, we took the TTM EPS prior to the announcement
and compared it to the TTM EPS one year after the announcement. In addition to
looking at absolute TSR, we also looked at returns relative to the S&P 500, which
serves as an appropriate benchmark.

Contested Elections Research

June 2015

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

Overall, our data suggests that these types of financial engineering campaigns,
broadly speaking, do in fact unlock shareholder value, with one (highly important)
caveat. Across each of our four financial engineering verticals, the average TSR since
the announcement date has been more than 25%. Here, the fact that the average
TSR in these situations has been less than 1% on the announcement date and only
about 5% during the 60-day window around the announcement date suggests that
the value created during these campaigns goes beyond an initial short-term pop
in the target companys stock price. Instead, the fact that the average TSR is nearly
20% one year after the announcement and continues to rise past 25% past the oneyear mark indicates that the unlocked value is reasonably sustainable, which should
please institutional shareholders.

Average TSR - All Financial Engineering Campaigns

30%
25%
20%
15%
10%
5%
0%
TSR 1 Year After
Announcement

TSR On Announcement
Date

TSR During 60-Day

Window

TSR to Present

However, our results do not suggest that financial engineering transactions are
universally accretive to shareholder value. Instead, the data indicates that certain
types of financial engineering are considerably more successful than others. On
average, acquisitions have been the least successful of our four types of financial
engineering, with an average TSR since the announcement of -3.56%. The three
other strategies, are generally value-accretive. Buybacks, divestitures, and spin-offs
all have an average TSR since the announcement of more than 15%, with spin-offs
generating more than 50% TSR.

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June 2015

Average TSR Since Announcement

60%

Dave Whissel
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50%
40%
30%
20%
10%
0%
-10%
Acquisitions

Buybacks

Divestitures

Spin-Offs

Interestingly, about half of the campaigns where the activist pushes for strategic
acquisitions have resulted in the destruction of shareholder value. This may suggest
that, although activists today are more operationally savvy than ever, management
teams are still in a much better position to assess the benefits of strategic
acquisitions. This is the clearest indication from our data that there are still certain
areas that lie beyond activists core competencies.

% Negative TSR Since Announcement

60%
50%
40%
30%
20%
10%
0%
Acquisitions

Buybacks

Divestitures

Spin-Offs

These results are reversed when looking at median returns over the 60-day window
surrounding an announcement. In that case, acquisitions seem to be well-received
by the markets, with a median TSR of more than 3% double that of the next-closest
strategy. Spin-offs have the lowest median TSR over the very short-term, which
should perhaps be expected given that the financial benefits of that particular
strategy (e.g., the re-rating of the Parent and SpinCo with higher multiples) take
longer to play out.

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Median TSR During 60-Day Window

3.5%
3.0%

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2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Acquisitions

Buybacks

Divestitures

Spin-Offs

However, whereas financial engineering strategies have been largely conducive to

shareholder value in terms of TSR, these same strategies have often been dilutive to
shareholder value in terms of EPS. Of the four types of financial engineering we
examine, only one divestitures has produced positive median EPS growth. With
respect to the other three strategies, median EPS growth is slightly negative.
Interestingly, campaigns centered on buybacks have not been especially productive
in terms of growing EPS; which seems counterintuitive given the positive benefits of
decreasing the share count. It could be that the benefits to EPS produced by this
strategy are largely short-lived if the target company does not substantially alter its
operating efficiency.

Median EPS Growth

15%
10%
5%
0%
-5%
-10%
-15%
Acquisitions

Buybacks

Divestitures

Spin-Offs

Predictably, less than a third of spin-offs are actually accretive to EPS, which makes
sense given that the surviving parent company is left with a smaller earnings base
following the spin; for divestitures, this figure rises to about 60%.

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Contested Elections Research
June 2015

% EPS Accretive
70%

Dave Whissel
Director of Research
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+1 212 961 7506 x211

60%
50%
40%
30%
20%
10%
0%
Acquisitions

Buybacks

Divestitures

Spin-Offs

Once again, we note that campaigns focused on pushing for strategic acquisitions
have been largely ineffective at creating longer-term shareholder value, and that
divestitures addition by subtraction have been comparatively more successful.
Finally, it is important to note that, while our data indicates that financial
engineering activism does create value on an absolute basis, there is no evidence
that shareholders of these companies are necessarily better off than they would
have been had the activism never occurred. The median TSR of all types of financial
engineering trails the S&P 500 over a one-year time period and since the transaction
announcement.

Median TSR
30%
25%
20%
15%
10%
5%
0%
TSR Since Announcement
Financial Engineering Situations

TSR 1 Year After Announcement

S&P 500

Overall, financial engineering situations have trailed the S&P 500 since the
transaction announcement nearly 60% of the time. And while this paints financial
engineering with a fairly broad brush, we note that only one of these strategies
spin-offs has beaten the S&P 500 since the transaction announcement. As
mentioned above, the fact that acquisitions have fared so poorly reinforces the idea
9

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ACTIVISM REPORT
that management teams (rather than activists) are likely best-suited to make those
types of high-level capital allocation decisions.

Average TSR Since Announcement

60%
50%

51%

48%
40%

40%

33%

Contested Elections Research

June 2015

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

36%

30%

30%
18%

20%
10%
0%
-10%

-4%
Acquisitions

Buybacks
S&P 500

Divestitures

Spin-Offs

Activist Investments

Conclusion
While we are hesitant to draw broad-based conclusions from a sample set of 100,
there are several interesting takeaways from the data. First, when examining the
merits of an activists campaign, the type of financial engineering matters.
Acquisitions have typically been dilutive to shareholder value over the long-term,
while spin-offs have generated strongly positive returns; this suggests that
shareholders should examine activist campaigns that push for strategic acquisitions
with a good deal of scrutiny.
Second, while managers like BlackRock CEO Laurence Fink may rail against the
short-termism inherent in activism,19 our data suggests that these kinds of
transactions may actually have moderate longer-term benefits to shareholders. The
short-term initial pop around the announcement of these transactions is minimal
compared to the value that is created in the next year and beyond.
Lastly, our data comes with an important caveat: Given the fact that shareholder
returns in financial situations typically trailed the S&P 500 over the same time
period, shareholders have legitimate reason to be wary of activists that advocate for
financial engineering transactions such as share repurchases, divestitures, and spinoffs. The results from our sample set suggest that financial engineering has been a
valid and productive strategy on an absolute basis, but it is not clear that
shareholders are actually any better off after the activist intervention. In fact, our
data suggests that shareholders in activist-targeted companies may actually be
better-served by selling their shares in these troubled companies and following

19

Sorkin, Andrew Ross. BlackRocks Chief, Laurence Fink, Urges Other C.E.O.s to Stop Being So Nice to Investors.
The New York Times. 05 June 2015. Available at:
http://www.nytimes.com/2015/04/14/business/dealbook/blackrocks-chief-laurence-fink-urges-other-ceos-tostop-being-so-nice-to-investors.html

10

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Jeffrey Sonnenfelds advice by investing in broad index mutual funds.20 While we
admit that the goal of most activist hedge funds is to achieve absolute, uncorrelated
returns, this is a troubling conclusion for those that claim that activism is generally a
force for good.
Ultimately, our message for shareholders is a simple one: In assessing the merits of
a particular activism campaign, shareholders should not assume that the
consequences will be positive, or even that the interests of activists are wholly
aligned with the shareholders they purport to serve. Instead, each activist campaign
deserves and requires a careful and thorough assessment of all the relevant facts.
Our data demonstrates that not all types of activism, and indeed, not all activists,
are necessarily equally adept at creating shareholder value. Some may be largely
beneficial, but others merit additional scrutiny.

20

Sonnenfeld, Jeffrey. Activist Shareholders, Sluggish Performance. The Wall Street

Journal. 09 June 2015. Available at: http://www.wsj.com/articles/jeffrey-sonnenfeldactivist-shareholders-sluggish-performance-1427929984

11

Contested Elections Research

June 2015

Dave Whissel
Director of Research
david.whissel@proxymosaic.com
+1 212 961 7506 x211

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June 2015

Appendix: Sample Set and Aggregate Data

Number of "Financial Engineering" Campaigns in
Sample Set

Dave Whissel
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JANA Partners
Starboard Value
Blue Harbour Group
Stilwell Value LLC
Relational Investors
Elliott Management
Orange Capital LLC
Third Point Partners
Carl Icahn
Pershing Square Capital Management
Sandell Asset Management
Corvex Management LP
Barington Capital Group
Clinton Group
ValueAct Capital Partners
Atlantic Investment Management
FrontFour Capital Group
Engaged Capital
Eminence Capital
Lawrence Seidman
Voce Capital Management
Greenlight Capital, Inc.
Trian Fund Management
Altai Capital Management
Third Avenue Management LLC
Bulldog Investors
The D3 Family Funds
Harry Wilson
Steel Partners Holdings L.P.
Carlson Capital
SpringOwl Asset Management
Western Investment
Riley Investment Management
Kettle Hill Capital
Raging Capital Management
Harbinger Capital Partners
Paulson & Co
Engine Capital LP
Meruelo Investment Partners
California State Teachers' Retirement System
Marcato Capital Management
Audley Capital
Luxor Capital Group
Livermore Partners
0
Source: Activist Insight

12

10

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Average TSR One Year After Announcement

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Audley Capital

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Engaged Capital
The D3 Family Funds
Altai Capital Management
Raging Capital Management
Third Point Partners
Steel Partners Holdings L.P.
Elliott Management
Atlantic Investment Management
Engine Capital LP
Relational Investors
California State Teachers' Retirement System
Corvex Management LP
Lawrence Seidman
Sandell Asset Management
Western Investment
Blue Harbour Group
JANA Partners
Orange Capital LLC
Carl Icahn
ValueAct Capital Partners
Harbinger Capital Partners
Pershing Square Capital Management
Starboard Value
Bulldog Investors
Stilwell Value LLC
Greenlight Capital, Inc.
Voce Capital Management
Marcato Capital Management
Trian Fund Management
Paulson & Co
FrontFour Capital Group
Clinton Group
Kettle Hill Capital
-100% -50%
Source: Activist Insight

13

0%

50% 100% 150% 200% 250% 300%

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Frequency of Activist Objectives Over Past 10 Years

(excl. Board Representation)

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Use Universal Ballot

Takeover Company
Succession Planning
Spin-off/sale of business division
Share Repurchase
Separate Chairman & CEO
Sell/Retain Assets
Return Cash to Shareholders
Restructure Debt
Replace Management
Replace Auditor
Remuneration
Removal of CEO or other Board member
REIT / MLP Conversion
Redemption/Amendment of Poison Pill
Recapitalization
Push for/Oppose merging of shares
Push for Sale of Company to third Party
Push for Merger of Company with third Party
Push for Company Division
Push for acquisition of third party
Oppose Terms of Merger
Oppose takeover terms
Oppose Proxy Contest
Oppose merger
Oppose Equity Issuance
Oppose acquisition of third party
Operational Efficiency
Nepotism
Lack of/Inaccurate information from Company
General Cost Cutting
Focus on Growth Strategies
Excess Cash
Equity Issuance
Eliminate Staggered Board
Elect Director
Dividends
Closure of Business Unit
Change Board Composition
Cancel Contract
Business Restructuring
Business Focus
Board Independence
Amend Bylaw
Adopt Majority Vote Standard
0
Source: Activist Insight

14

20

40

60

80

100

120

140

160

180

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