The Long-Run Effects of Activist Investors

In the “Ernst & Young Roundtable” at the top of the issue, the motives, methods, and economic consequences of shareholder activists are discussed by a group that includes two highly regarded academics, three representatives of activist hedge funds, a number of corporate advisers, and the CFO of a highly successful company with four years’ experience in dealing with a well-known activist—in fact, Carl Icahn. The discussion begins with a review by Harvard Law School’s Lucian Bebchuk of the findings of his recently published study of the longer-run effects of hedge fund activists on corporate performance and values. The study is the first of its kind since activist critic Marty Lipton issued a formal call for such a study several years ago. And in pointed contrast to the claim of Lipton and others that activists pressure companies to improve short-term operating performance while sacrificing the corporate future, Bebchuk and colleagues finds fairly continuous improvement in corporate operating performance over the five-year period after the activists acquire their positions.

Also contrary to the popular perception, the companies that activists invest in show no tendency to give up the significant gains in stock price—on the order of 6-7%—that occur when activists simply announce their intention to “engage” the companies.

In the comments that follow Bebchuk, the other panelists provide a body of testimony that Rick Ruback, the other representative from Harvard on the panel (and collaborator with Jensen on pioneering research on the U.S. corporate control market), sums up as follows:

What I find remarkable about today’s investor activists is the way that our corporate control markets have succeeded in transforming what was once an incredibly blunt tool—proxy fights—into what I would describe as their “sharpest knife.” My sense is that activism is a massively more efficient way of exerting corporate control and improving corporate performance than what we’ve had before.

And this is likely to be good news for the U.S. public corporation.

Chasing Down Unicorns

In the article that follows the roundtable, “In Search of Unicorns,” Keith Brown and Ken Wiles of the University of Texas provide striking evidence of both agency and regulatory compliance costs in the form of a very recent development: the tendency of high tech companies to stay private longer while raising large amounts of equity capital through PIPOs—or private IPOs—that would have previously been raised by going public in IPOs. They also explore the ways in which the unicorn valuations can be manipulated as well as the longer-term advantages and disadvantages of private financing. Ultimately, whether many of the 142 companies that have attained valuations as private companies in excess of $1 billion—thus qualifying them as “unicorns”—will ever choose to go public is an open question.

Biopharma R&D has improved dramatically after a decade of sharply declining productivity. This was predicted by authors of our third article, Rachel Leheny and Eric Roberts—former leading life sciences bankers turned biotech fund managers in a 2000 research report called “The Fruits of Genomics.” The industry has found ways to restore that productivity and this was accomplished in part with considerable prodding from activist investors—including, you guessed it, Carl Icahn.

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