On Tuesday, activist investor Starboard Value revealed a significant stake in Salesforce, sending the company’s stock climbing more than 7%. A hedge fund founded in 2002 by Jeffrey Smith and Mark Mitchell, Starboard has a history of affecting change at major companies, spurring the spinning off of media startup Patch from AOL in 2014 and the replacement of the entire board of directors at Darden Restaurants, the company that owns Olive Garden and Longhorn Steakhouse.
Activist investors — typically specialized hedge funds that buy significant minority stakes in publicly traded companies with the goal of changing how they’re run — have become more active within the tech sector in recent years. According to an analysis by Bloomberg Law, investor activists launched more campaigns in tech during Q2 2022 than in any other sector.
But how many of these activists have been successful in achieving their aims? It depends on how you define success.
A Harvard, Columbia and Duke University study published in 2013 looked at 2,000 interventions by hedge fund activists from 1994 to 2007. It found that, in the short run, stocks tend to rise around 6% when activist investors get involved. And the upswings aren’t temporary. In the five years after activist investors show up on the scene, the stock prices of companies targeted by them tended to hold onto the initial gains — even when the activists employed hostile tactics.
Consider the split-up of Motorola’s business in 2008, a move advocated by activist investor Carl Icahn. In 2011, owners of Motorola held stock worth over 20% more than it was before the split — much of it as a result of Google’s deal to buy Motorola’s mobile-focused spinout Motorola Mobility. As Icahn predicted, divvying up the company made the individual pieces more enticing.
That’s not always the case, however — as the past decade or so shows.
Acquisitions and dividends
From 2010 through 2014, the number of challenges by activist investors to companies with more than $100 million in market capitalization more than quadrupled. The tech sector became a prime target as it recovered from the dot-com crash and matured, creating an opening for activist investors.
In 2013, Icahn acquired a significant stake in — and sued — Dell, attempting to block the PC maker’s $25 billion bid to take itself private. Criticizing the bid as too low, Icahn teamed up with Southeastern Asset Management to make an offer for the company. It wasn’t successful. However, Icahn’s tactics led Dell founder Michael Dell and Dell’s partner, investment firm Silver Lake, to raise their price by about $500 million.
Around the same time that Icahn launched his lawsuit, David Einhorn’s Greenlight Capital filed suit against Apple to force the company to release its pile of cash — which totaled $137 billion at the time — to shareholders in the form of dividends. Einhorn ultimately dropped the lawsuit, which had been motivated in part by a 39% dip in the company’s stock. But Einhorn did succeed in bringing attention to Apple’s resistance to expanding its dividend and share-buyback program.
While Greenlight’s campaign proved unsuccessful in the end, plenty of other tech companies that found themselves the target of an activist investor implemented dividend programs after the issue was raised. According to Boston Consulting Group, at least 29 firms initiated dividend payouts between 2008 through 2013.
In some cases, investor activism has forced a major sale, like with IT firm Riverbed Technology in 2014. Elliott Management, led by Paul Singer, acquired 10% of Riverbed and launched a lowball acquisition bid, hoping to spark higher offers that Riverbed would be forced to accept. Riverbed, lacking leverage — the company had failed to reach several recent internal earnings targets — eventually agreed to be acquired by private equity firm Thoma Bravo for $3.6 billion.
Elliott also played a role in the breakup of Compuware, once a large player in the enterprise mainframe software space. Elliott and hedge fund Sandell Asset Management bought Compuware stock as the company’s revenues shrank, pushing Compuware to pay dividends, lay off employees, cut projects in Detroit (where Compuware was based) and sell Compuware’s HQ building. Elliott made an unsolicited takeover bid, which Compuware rejected as too low — but prompted it to declare its first dividend to shareholders, launch a cost-reduction program and replace six of its 11 board members.
Compuware — like Riverbed — ultimately sold itself to Thoma Bravo, to the tune of $2.4 billion.
In one of the more infamous examples of investor activism, Elliott pressured software giant EMC to split up the enterprise and spin off its virtualization software unit, VMware, into an independent company. Elliott argued that the piecemeal units of EMC were worth more than EMC as a whole and would unlock shareholder value if broken up.
In response, EMC signaled a willingness to buy out VMware and an intention to cut costs by $850 million, in large part through layoffs. Dell proved to be EMC’s savior, buying the entire company for $67 billion in 2016. (Ironically, Dell ended up spinning out VMware itself in 2021.)
Steeper demands and divestments
Not every activist investor campaign yields the best outcome for the target. Nearly a decade ago, Yahoo (full disclosure: TechCrunch’s parent company) battled with Dan Loeb over Yahoo’s stake in e-commerce giant Alibaba. Yahoo eventually sold half of its stake back to Alibaba in 2012 for $7.6 billion, losing out on tens of billions of dollars of upside.
Early this year, Jana Partners, an investor known for its aggressive activism, proposed a plan to nominate four directors for Zendesk’s board and opposed the company’s attempted acquisition of Momentive, the parent company of SurveyMonkey. A few months later, Zendesk announced that it would sell itself to buyout firms for $9.5 billion; Jana then backed off.
In 2020, Twitter was in the crosshairs of Elliott, which tried to force out its CEO at the time, Jack Dorsey. After months of back and forth, the company and hedge fund reached an agreement that saw Silver Lake invest $1 billion in Twitter to finance the buyback of billions in stock, and Elliott and Silver Lake each got a board seat.
But other times, activist investors are aligned with the visions of company leaders. When Carl Icahn pushed eBay to divest PayPal in 2014, management was skeptical, noting that eBay’s earlier attempt to build a payment processor failed. But the two companies ended up separating later that year. And in the years since, the breakup has precipitated PayPal’s growth, with net payment volume on the platform increasing from around $53 billion in Q1 2014 to more than $339 million in Q2 2022, according to Statista.
Advocating for change
A more recent, fruitful activist investor campaign against Apple put pressure on the company to make parts and repair manuals available to the general public. In late 2021, Apple announced that it would no longer restrict access to parts, manuals and diagnostic tools, reversing a years-long policy.
While the company said at the time the shift had been in the works for “well over a year,” it came after a right-to-repair resolution filed by mutual fund company Green Century that asked Apple to reverse its anti-repair practices.
In an interview with The Verge, Annalisa Tarizzo, an advocate with Green Century, conceded that a combination of proposed state and federal laws — as well as impending Federal Trade Commission guidance — were likely factors in Apple’s decision. But the announcement came only months after Green Century filed its resolution — and on the day the Securities and Exchange Commission might’ve compelled Apple to bring the resolution to shareholders.
Microsoft was also faced with a right-to-repair activist shareholder resolution, brought by environmental nonprofit As You Sow in June 2021. It asked the company to study the environmental and social benefits of increasing access to repair. And to its credit, Microsoft not only agreed to conduct such a study but to act on the findings by the end of 2022.
Over the last couple of years, catalyzed by world events, activist shareholders have pushed tech giants to adopt proposals aimed at expanding whistleblower protections, curbing hate speech online and investigating potential civil rights violations. While unlikely to pass, the proposals have forced companies to argue for or against the various proposed changes on the record.
Arjuna Capital called for Alphabet, Facebook and Twitter to nominate a human rights or civil rights expert to their boards. Meanwhile, Trillium Asset Management filed a proposal urging a third-party review of Alphabet’s whistleblower policies.
Activist achievements
Activists may not always achieve what they set out to accomplish. But they do attract headlines. And on the whole, they’re a catalyst for change — positive or negative.
To the extent that there are common themes in activist investment campaigns, activists look to refine a business strategy, cut costs and boost shareholder return. They aim to accomplish these goals by, for example, pushing targets to spin off profitable units of the company, reduce operating expenses and use cash to boost shareholder returns.
Interestingly, activist investors don’t necessarily need to hold a massive share in a company to make waves. Stakes too small to qualify for a 13D filing with the Securities and Exchange Commission can still rally support from other activists or from institutional investors. For example, ValueAct Capital’s Jeffrey Ubben secured a board seat at Microsoft in 2014 with less than 1% ownership with the help of institutional investors.
Is that a good thing? It depends on your perspective. Boston Consulting Group found in an analysis that companies on average experienced a turnaround two years after activist investor intervention. But Peter Karmanos Jr., the founder of Compuware who was forced out by activists around a decade ago, might feel differently about their impact.
In any case, for corporations — particularly those with high capital spending and low return on capital — activist investors are the cost of doing business. Whether they try to keep them at bay or work with them, they can count on their influence, directly or indirectly, playing a part in their key decisions.