On June 13, 2019, activist hedge fund Trian Partners announced a 6 percent stake in a major plumbing and heating company.
Trian had entered into the investment with a reputation for confrontation. Not two years earlier, the hedge fund firm had waged the largest ever proxy fight against consumer goods company Procter & Gamble. Two years before that, Trian had engaged in another major proxy battle against chemical giant DuPont. Both campaigns were closely contested, widely reported, and highly expensive: Trian CEO Nelson Peltz told CNBC in 2017 that P&G had spent more than $100 million in its attempt to keep him off its board.
“Some activist hedge funds are viewed as hostile and others are not,” said Margarethe Wiersema, the dean’s professor of strategic management at the University of California, Irvine. “Nelson Peltz may be the most negatively perceived activist.”
There was no public campaign or contentious proxy battle over the future of Ferguson, the UK-based plumbing and heating products distributor targeted by Trian Partners in 2019. Even when Trian announced its $935 million stake, Peltz gave no public indication of his firm’s plans for the plumbing company.
But on September 3, 2019, the board of Ferguson made an announcement: The plumbing company planned to break up its U.S. and U.K. operations — a move that Peltz had reportedly pushed for. Ferguson’s U.K.-based chief executive John Martin would also step down, to be replaced by U.S. chief Kevin Murphy.
It its statement announcing the decision, Ferguson said the demerger “marks the conclusion of a detailed review of the Group’s assets over several years.”
A spokesperson for Trian emailed the following statement to Institutional Investor: “Trian was not contacted by Institutional Investor for comment regarding this deeply flawed academic study. In discussing the study, the reporter failed to provide even basic facts about Trian such as, since its 2005 inception, Trian has constructively engaged with over 35 companies and has had only 3 proxy contests. In an earlier version of the article, the reporter also said that Trian ‘pushed for’ the termination of Ferguson’s former CEO, John Martin, which is not true.”
Wiersema could not be reached for a response to Trian's comment by the time of publication. A spokesperson for Ferguson said the company does not comment on conversations with shareholders.
Trian’s quiet engagement with Ferguson is just one example of how reputation may impact the outcome of activist investments. Wiersema has studied this phenomenon over the last several years alongside co-authors Albert Ahn, a PhD candidate at U.C. Irvine, and Yu Zhang, associate professor of strategy at the China Europe International Business School.
“The thing that really interests me is, when an activist comes knocking, how does management respond and what are the implications?” Wiersema said.
In one of her latest studies, Wiersema and her co-authors explored what led to settlements — the situations where the target firm gives in to the demands of the activist investor. The biggest factor, they found, was reputation.
“When we first started four or five years ago, we thought hedge funds with more experience and more assets would have more clout. They didn’t,” Wiersema said. “Of all the factors that you think would lead to greater or less success in activist campaign, reputation has an effect above and beyond.”
Specifically, the management professor and her co-authors found that activist targets were more likely to settle when the activist investor had a reputation for being confrontational — a reputation earned by attacking target companies in public statements, engaging in proxy battles, and in the most extreme cases, filing lawsuits.
“What really matters is not how they do in this particular campaign, but what did they do before,” Wiersema said. “It really is about how hostile they’ve been in the past.”
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For the study, Wiersema and her co-authors analyzed 424 activist campaigns conducted by 49 activist investors between 2008 and 2014. The campaigns were identified using FactSet’s shareholder activism database SharkWatch, which tracks the top 50 activists each year.
The researchers then set out to quantify the reputations of the activists in their sample. To do so, they looked at whether and how often the activist investors engaged in proxy fights during their first three years of operation. “We measure an activist’s reputation for being confrontational by examining its actions and behavior in early campaigns since these are likely to form the basis for its reputation,” the authors wrote.
Trian, for example, would rank as confrontational because it engaged in a proxy contest with Heinz in 2006, shortly after the hedge fund firm’s founding in 2005. Other firms that Wiersema said would score highly are Bill Ackman’s Pershing Square Capital Management and Carl Icahn’s Icahn Enterprises.
“Certainly, Nelson Peltz and Bill Ackman started out very strongly,” she said. “That’s where their reputation came from.”
Using these reputation scores, Wiersema and her co-authors found that more confrontational activist investors had higher success rates in their later campaigns. For example, an activist firm that waged two proxy battles early on was found to be 23 percent more likely to succeed in getting its demands met than a firm that didn’t engage in any proxy contests in its first three years.
“The management and board of the firm is willing to acquiesce to the demands issued by a confrontational activist in order to avoid an unwanted hostile campaign wherein the activist publicly airs its concerns and criticisms,” the authors wrote.
But giving in so readily may not be the best outcome for the target firm and its other shareholders, Wiersema and her co-authors warned.
“Is agreeing to more of an activist’s demands in the best interests of the firm’s shareholders and stakeholders or has the board and management acted to serve their own self-interests?” they asked. “An empirical examination as to the long-run consequences of these campaigns is needed to clearly identify the outcome.”
This story has been updated to reflect comments from Trian.