Rob Swystun, Pristine Advisers
Shareholder activists may have hunted themselves out of prey, according to one financial research firm.
“Activism has become a crowded field, with too many players chasing after a diminishing number of attractive targets,” Moody’s Investor Service wrote in a recent report.
As reported by Matthew Heller on the CFO magazine website, this year will see shareholder activism reach a record high, bringing primarily negative implications for credit. But that also means shareholder activism should also see a slowdown next year, as it’s hit a sort of peak.
“Given growing headwinds, we think activism will level off and possibly decline in 2016, at least for North American nonfinancial corporates,” Moody’s analysts said.
The headwinds the analysts are talking about include declines in the inflows to hedge funds, plus a decline of attractive targets for them to go after. US interest rates may also climb, which would affect activism.
When the third quarter came to a close this year, there was $121.8 billion in activist hedge fund assets under management (AUM), according to Hedge Fund Research. This is down from $129.6 billion in the second quarter, the first drop in AUM since 2008.
“Activists still have plenty of firepower to shake up company boards, push for M&A activity, and seek business strategy changes,” Christian Plath, a Moody’s vice president, said in a news release. “But activism has become a crowded field, with too many players chasing after a diminishing number of attractive targets. And recent market volatility has somewhat reduced their ability to launch new campaigns.”
As of Oct. 15, activists have launched a total of 178 publicly announced campaigns, the Moody’s report says. That is compared to 165 during the same period last year. Moody’s is projecting between 225 – 235 activist campaigns at non-financial companies in 2015, which would beat the record of 222 set last year by activists.
“In most instances, this will be credit negative for the targets because of their increased susceptibility to forced changes” in strategic direction or financial priorities, Moody’s said.
The favorite targets of activists remain companies with a market cap of less than $1 billion, but the report says activists “have become increasingly emboldened to go after larger quarry.” This includes some huge targets like DuPont and General Electric.
A variable next year that could reduce activism further is market volatility, the Moody’s report said, as a long downturn in the market could reduce activism by forcing companies to “lower their risk tolerance and adopt more conservative strategic and financial policies.”
While shareholder activism is here to stay for the foreseeable future, the tide may be turning as it looks like activist hedge funds have been a little overzealous in hunting their preferred prey.