We've always known that activists target companies with lagging returns, but using the SharkRepellent database and FactSet total return data, we can now see exactly how much a stock normally falls before coming into activist crosshairs.
The study, which looks at all activist campaigns with primary campaign type Board Control, Board Representation, Maximize Shareholder Value or Remove Officer since 1-1-2006, shows that median one-year underperformance leading up to the week prior to campaign announcement is 22.2% versus same-period Russell 3000 return, and three-year underperformance is 41.0%. (The week prior to the campaign announcement often sees a bump as the activist raises its stake, so the measurement period ends there.)
In the below chart, one can see the cumulative median underperformance preceding campaign announcements steadily increases over the course of the three years. The thick blue line is the median underperformance. The underperformance for companies targeted in 2013 is highlighted in red. Underperformance is steepest in the year prior to the campaign announcement, but activist targets also underperformed in the second and third years prior to the campaign announcement.
Naturally, companies were much more likely to face an activist campaign if they underperformed. Of the 1,123 activist targets with available three-year returns, 70.3% underperformed the Russell 3000 by at least 10 percentage points. In contrast, only 21.5% of activist targets outperformed by more than 10 percentage points, implying that significant underperformers are more than three times more likely to be targeted by activists than significant outperformers. (The remaining 8.2% of companies matched the Russell 3000 within 10 percentage points.)
The chart below shows in blue the distribution of pre-announcement activist target three-year out/underperformance versus the Russell 3000 index. For comparison, the three-year out/underperformance distribution of the current individual Russell 3000 constituents is included in green.
The activist formula hasn't changed much over the years: 2013's median 1-year and 3-year underperformance was 22.0% and 41.0% respectively, close to the previously mentioned medians for all years of 22.2% and 41.0%. That said, activists have indeed had to target companies with positive, if not outperforming, returns: the median 3-year total returns for 2012 and 2013's activist targets were positive for the first time since 2006.
To obtain a copy of the Excel data underlying this report, clients may email firstname.lastname@example.org To replicate this report, search in the Activism (SharkWatch) tab for all activist campaigns announced between 1-1-2006 and 12-15-2013, primary campaign type Board Representation, Board Control, Maximize Shareholder Value, or Remove Officer. For Activist/Holder Type, select all types except for Corporation, in order to avoid corporate hostile bids. Exclude closed-end funds (as those are normally targeted because of a discount to NAV, not general price underperformance). Create a custom report with the CUSIP of the target company and the announcement date of the campaign. Use the Remove Duplicates function in Excel to ensure only the earliest campaign for each company is included. (Merger opposition campaigns are not included in this study, as one would expect that recent share price performance for companies agreeing to mergers would be positive. Hostile bids from corporations are also not included, in order to maintain the scope within pure shareholder activism.)
Due to an Excel error, some numbers in the original article were off by a few percentage points. The above article has been updated to reflect the corrected figures.