July 1, 2020

Breakingviews: Activists are ready to play, but lack playbook

by Breakingviews.

A pair of academics have upset Elliott Management with a blog post about their recent research. They conclude that activist investors bring short-term gains for shareholders but longer-term decay in cash flow, investment and social performance. That encapsulates the case against hedge funds like Paul Singer’s, perhaps especially in a post-coronavirus environment when many people see profit as the least of a company’s priorities.

Paul Singer’s hedge fund has clinically picked apart the example the researchers from Pennsylvania State University and HEC Paris used in the post, an investment by Elliott in energy group Hess. The firm’s arguments against the broader thrust of the paper are less convincing, though there is other academic work suggesting activism can produce long-term benefits.
The inside-finance debate matters, because market volatility and the corporate distress caused by Covid-19 have provided conditions for activists to take stakes in new targets “largely undetected,” according to experts at JPMorgan.

As the bankers’ report notes, struggling companies will have fewer places to hide, and activists love to push for mergers and acquisitions – the fastest-growing category of their demands over the past 10 years, according to the authors. That fits with the likely need for consolidation to keep businesses afloat.

That said, some traditional activist methods are off the table, like pressuring companies to borrow more to fund payouts to shareholders. Management teams and more cautious shareholders will probably not support that again for a while. And it’s possible that the coronavirus experience will accelerate the shift in investor preferences toward a management approach that more directly benefits employees and other stakeholders, not just shareholders.

One prominent researcher, Lucian Bebchuk at Harvard Law School, argues that managers will only do right by these constituents if the necessary actions also ultimately benefit the share price, and that government regulation is required to force them to do other things. That broadly aligns with the views of Elliott and its peers.

Despite persuading a few people, though, Bebchuk lost an online debate hosted by Oxford’s Said Business School last week by about a two-to-one margin. The winner, the school’s Colin Mayer, argued bosses and boards need accountability to all stakeholders. JPMorgan may be right that activists are ready to play again. But their playbook still needs a post-pandemic rethink.

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