Activists Bark Loudly With Smaller Bites

Do companies have to listen to every activist who shows up, no matter how small the stake? The phenomenon of cantankerous shareholders staking their claim on very large companies with ever smaller interests has grown since ValueAct elbowed its way onto

Microsoft

’s roster in 2013.

Carl Icahn,

Dan Loeb

’s Third Point and

Nelson Peltz

’s Trian Fund Management have all swayed huge targets with a relatively small presence in recent years. A week ago,

Paul Singer

’s Elliott Management flagged a $3.2 billion investment in

AT&T
,

the telecom giant with a $280 billion market capitalization, in a letter demanding big changes. Elliott’s stake in the company and subsequent campaign will gain it notoriety and probably will become a distraction for management in the coming months. It is asking AT&T to consider unwinding some of the current chief executive officer’s landmark initiatives—a major reversal.

In many cases, though, it isn’t clear whether companies would have taken decisions on their own accord. Unlike passive investors, activists agitate to make changes to corporate structure or other operations, often asking them to give their own representatives a seat at the table. To gain the control they need, they typically take decent-sized stakes. Activists that take on targets with a market capitalization of more than $500 million, which constitutes roughly 200 campaigns a year since 2013, take 6% stakes on average, but often approaching 8%, according to data published by Lazard’s advisory group. That is clearly far harder in the case of the largest corporations, necessitating smaller stakes such as ValueAct’s less than 1% stake in Microsoft in April 2013. That same year, Mr. Icahn took a similarly modest stake in Apple. In 2015, Mr. Peltz’s Trian Fund Management accumulated a $2.5 billion stake in

General Electric
,

then equal to roughly 1% of its market capitalization. On Valentine’s Day 2017, Trian hearted Procter & Gamble with a roughly $3 billion stake in the then $225 billion company. A few months later, Mr. Loeb’s Third Point took a stake in

Nestlé

of roughly the same size. Elliott’s AT&T bid falls into this category. A broad look over these past campaigns suggests that activists have mostly succeeded in being heard, but their effectiveness is less clear. After only a few months, ValueAct’s Mason Morfit got a seat on Microsoft’s board. Mr. Icahn’s investment in Apple did well, but the company had begun buying back shares, as he urged, before his appearance. Mr. Peltz’s stake in GE has been decidedly less successful.

P&G
,

meanwhile, has only recently started to perform well.

It can’t hurt to have someone keep a board accountable but, in aggregate, activists’ presence isn’t necessarily a good thing. A paper published at the end of last year by researchers including David Larcker at Stanford University found that “pre-to-post-activism long-term returns insignificantly differ from zero” regarding shareholder wealth and the economy. Hedge Fund Research’s Activist Index has underperformed the S&P 500 every year for the past six years and its total return since 2008 has been just 31%. Investors can more easily hold activists accountable if they go for both size and presence. Relative no-namers Abrams Capital, Knighthead Capital and Redwood Capital bought a roughly 10% combined stake in

PG&E

in mid-January when the California utility announced its plans to file for bankruptcy. They have helped replace the CEO and board members, appointing mainly industry experts. Elliott has its work cut out at AT&T. The stock had been a relative underperformer, but has returned around 30% year-to-date following a lengthy battle to buy Time Warner. Elliott’s suggestions, including hiving off DirecTV, could prove difficult. And in making

John Stankey

the heir apparent for AT&T CEO

Randall Stephenson,

the company has its own plan for succession under way. Elliott’s presence could prove a distraction at a difficult time. The company might partially acquiesce to Elliott without undoing Mr. Stephenson’s legacy. Investors could rightly ask, though, whether the intervention made much of a difference. Write to Lauren Silva Laughlin at lauren.silvalaughlin@wsj.com

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