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Bottom Lining The Value Of Proxy Fights

Carl Icahn, the epitome of activist investors, has taken on a variety of proxy fights of late. But just what is the value of a proxy fight to an investor? Institutional Investor takes a look at the numbers.

Bottom lining the value of proxy fights

Carl Icahn’s flurry of proxy fights and aggressive regulatory filings this year has drawn attention once again to activist investors, who seemed all but dormant during the global market downturn.

Most recently, he teamed up with Seneca Capital to thwart Blackstone Group’s deal to buy Dynegy, asserting that the stock was undervalued.

Now he is planning to put up five directors for election at Lionsgate Entertainment’s next annual meeting at the same time he extended to December 10 his $7.50 per share offer for the rest of the company.

More quietly, other activists have been somewhat busy as well, including Jana Partners and VA Capital.

While it seems from the outside that their actions help shareholders of the targeted companies, I decided to bottom line their activities. Afterall, that’s why activists do what they do—to make money.

So, I went to the best source for such scorekeeping: FactSet SharkWatch.

They looked at the returns from 226 proxy fights that resulted in board seats since January 1, 2005. This includes all proxy fights, not just those involving hedge funds – although a majority of them were waged by hedge funds they tell me.

The results are interesting.

In the short run, there is no apparent benefit.

For example, one month after the proxy fight was won, the target company’s stock, on average, fell by nearly 1 percent. This compares with a gain of about 0.6 percent for a couple of widely followed indices, including the S&P 500. So, the total lag works out to about 1.3 percent. Not too impressive, huh?

The results are similar six months after the proxy fight. Altogether, the target’s stock trailed the S&P 500 by 1.3 percent or so and the S&P 1500 by 1.5 percent or so.

Not exactly an endorsement for activists, huh?

Now, you can’t exactly make the charge that perhaps the activist took the money and ran. Remember, they just won the proxy fight, so they most likely remained in the stock as well.

But, wait. The story reads differently the further out you go.

For example, one year later the average target’s stock was about 2.4 percent higher while the S&P 500 climbed just 1.2 percent or so during the same period, resulting in out-performance of 1.24 percent.

A little more encouraging.

If you go out two years later, then you start to see meaningful benefits. At that point, the target’s average return is about 7.2 percent compared with a decline of about 0.8 percent in the market, resulting in a total outperformance of nearly 8 percent compared with the S&P 500.

Not bad. But, one would think that given all of the efforts and costs involved in waging a proxy fight, the gain would have been much greater than 8 percent after two years.

However, what this data can’t show is the average price the activist paid for the stock before the proxy fight was waged. They would have had to pay much less than the price of the stock two years after winning the battle for the exercise to have been worthwhile.

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