Finding Friends is Hard: Long-Term Investors’ Relationship with Proxy Advisors, Activists and Private Equity Funds

Institutional investors are howling for US public companies to focus more on the long-term.^[1]  This is unsurprising. Long-term focused companies produce significantly better results over time, reporting far greater revenue growth with less volatility, far higher levels of economic profit, and greater total return to shareholders.^[2] So if you are holding stock for a long time, a long-term focus for your portfolio companies is critical.

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So who is picking up the tab?

There seem to be a variety of possible answers.

If the bulk of the value transferred comes from the payment of a takeover premium (as Professors Coffee and Palia and Professor Allaire think likely)^[19], then the argument could be made that the additional value comes from the third party buyer of the shares – a gift from heaven.  However, this may not be something long-term holders should thank activists for.  The pie has not actually gotten bigger, and no new value has been created.  A sale just represents a cashing in of chips held.  For a long-term holder, there is no need to capture the inherent control premium in any particular time period, and there is no reason to think that the time period selected by an activist (with median holding periods of 266 days)^[20] will be particularly advantageous for long-term holders.

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[19] Id. at 59 (“All told, this evidence suggests that changes in the expected takeover premium, more than operating improvements, account for most of the stock price gain.”); Yvan Allaire & Francois Dauphin, The Game of ‘Activist’ Hedge Funds: Cui Bono? 26, International Journal of Disclosure and Governance (Dec. 31, 2015) (“Our study, similar to several others, show that the best way, bar none, for these activists to make money for their funds is to get the company sold off or substantial assets spun off.”).

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