The Good and Bad of Shareholder Activism

By Chad Langager | February 13, 2006 AAA

Shareholder activism, love it or hate it, has seen a resurgence of late. Hedge fund and private equity managers are becoming far more active in the management and direction of companies. Many question the effectiveness of these activists in terms of their ability to increase the value of companies. Let's take a look at two recent examples.

The Good
The owner of the Washington Redskins, Daniel Snyder, had more success in 2005 in the corporate world than his team did on the field (lost in NFC Division game). In August 2005, Snyder, the largest shareholder of theme park operator Six Flags (PKS), launched a tender offer to increase his stake in the company from 11.7% to 34.9%. His intention was to remove the management team which he felt underutilized the company's assets. Snyder didn't end up increasing his stake but did win a proxy battle which resulted in him taking over three seats on the board.

With the seats Snyder removed the management and placed Mark Shapiro as the new CEO. Since the tender offer, shares in Six Flags have nearly doubled as the company has initiated a clear plan to improve revenue and increase attendance at its parks. This is a good example of an instance where a shareholder stood up and enacted positive change.

The Bad

In April 2005, Carl Icahn the largest shareholder of Blockbuster Inc. (BBI) sent a letter to CEO John Antioco, stating his displeasure in the compensation package that Antioco received in 2004 ($51M) along with the way in which the company was being run (shares fell 50% in 2004). Icahn was looking for the company to pay a one-time dividend of $330M, cut its "excessive" spending on its online rental service, and reduce pay packages for executives. Icahn also nominated himself and two others to the board. All three were nominated at the 2005 annual meeting, giving Icahn much more influence in the company.

Since the letter the one-time dividend has not materialized, however the company has cut costs recently including slashing 300 corporate jobs. Icahn's activism has done little to impede the sell-off in Blockbuster shares, which have fallen over 60% since the appointment of Icahn to the company's board. Factors weighing on the stock price include increased competition from Netflix (NFLX) and a sluggish environment in the film industry in general. It looks as though the industry-wide problems are too much for this active shareholder to overcome.

While these are just two examples of shareholder activism in the last few years, it seems to be the general trend, one of hit and miss. Other companies that have gone through some recent battles with activists along with their 52-week share performance include Fairmont Hotels (FHR 43.08%), BKF Capital Group (BKF -65.67%), and Cenveo (CVO 382.76%).

In the future if a company you are invested in goes through one of these battles make sure that the plan put forth makes sense for the company and does not simply meet short-term goals of the activist.

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