What Activist Investors Actually Do, In Five Real Fights

Introduction

In November 2017, Procter & Gamble told its shareholders it had won. The company said its eleven board nominees had been elected, and that the activist investor trying to join them, Nelson Peltz, had fallen short by more than six million votes. Six weeks later, an independent inspector finished a hand recount of more than two billion shares and reported the opposite. Peltz had won, by 42,780 votes. A margin of 0.0016 percent decided the most expensive proxy fight in corporate history, and for six weeks, the company that owns Tide, Crest, and Gillette did not actually know who its own shareholders had chosen.

That is the fact an explainer on activist investing has to start from, because it is the whole mechanism in one number. A share of stock carries one power almost no one uses: a vote. An activist investor is not a different category of shareholder. He is the shareholder who decided to use it, and who built enough of a position that the vote would matter.

The stake comes before the letter

Nothing public happens until someone has already bought in. In March 2013, Carl Icahn disclosed a stake of roughly six percent in Dell, opposing the price Michael Dell and Silver Lake Partners had offered to take the company private. Over the following months Icahn kept buying, reaching 8.9 percent, or 156.5 million shares, by August. He was arguing, in a public letter, that the buyout price of $13.65 a share undervalued the company and that a special dividend of $9 a share would deliver more to ordinary holders than a sale to the founder himself. The dividend never happened. In September 2013, Icahn told shareholders directly that he could not defeat the vote and was ending the fight. The stake was real money, at risk, for six months, before anyone found out whether the argument would win.

The letter is a number with a date on it

An open letter from an activist fund is not written to persuade a boardroom. Boardrooms rarely reply to persuasion. It is written to put a specific, checkable number in public, with a deadline attached, so that everyone watching can later confirm whether it was right. In September 2019, Elliott Management disclosed a $3.2 billion stake in AT&T, about one percent of the company, and released a twenty four page letter arguing that years of acquisitions, DirecTV and Time Warner among them, had left the company undervalued. Elliott put a figure on it: $60 or more per share by the end of 2021, a gain of more than sixty percent from where the stock traded that Friday. By late October, AT&T's chief executive had reached an agreement with the fund on cost cuts and board changes. The letter did not argue AT&T into anything. It gave the market a number to hold both sides to.

Two ways a vote actually resolves

Most fights end one of two ways, and the difference is worth naming plainly, because it explains why some activists win with almost nothing and others need almost everything. In May 2021, a fund called Engine No. 1 held a stake in ExxonMobil worth a small fraction of one percent of the company. It nominated four outside directors over Exxon's climate strategy and capital discipline, and it won three of the four seats, because Vanguard, BlackRock, and State Street, holding a combined twenty percent of the company, voted for its nominees instead of Exxon's. Size of stake did not decide that fight. Size of the argument, and who found it credible, did.

Compare that to Starboard Value and Yahoo. Starboard spent two years pressing Yahoo to sell its core business and replace its board, and in 2016 it nominated a full slate to replace all nine directors. The fight never reached a vote. Yahoo settled first, in March 2016, giving Starboard four board seats and expanding its own board to accommodate them. A year later, Yahoo's core business was sold to Verizon. The word for what happened is a settlement, and it is worth being precise about what that word is hiding. It means Yahoo's board looked at the count it expected to lose and chose to negotiate the terms of losing, rather than let a public vote establish exactly how badly.

Sometimes the fight is over who gets to vote at all

Not every activist campaign waits for an annual meeting. In February 2013, David Einhorn's Greenlight Capital sued Apple over a single item on that year's ballot, a proposal that would have restricted the company's ability to issue preferred stock without a separate shareholder vote. Einhorn's objection was not about disclosure. He wanted Apple to distribute part of its $137 billion in cash through a new security, what he called iPrefs, and the ballot proposal would have made that harder. A federal judge agreed the item had been improperly bundled with two unrelated matters, and ordered it pulled from the meeting before shareholders ever got to vote on it. Greenlight dropped the suit once the item was gone. Apple's own shareholder ballot, that year, was edited by a court before it reached the people who were supposed to vote on it.

The ordinary ending is a partial one

Most of these campaigns do not end in a knockout for either side. In September 2018, Daniel Loeb's Third Point moved to replace all twelve directors at Campbell Soup, accusing the board of mismanagement after the sudden departure of its chief executive that spring. Over two months the demand shrank. By November, Third Point and Campbell had settled: two of its five nominees would join an expanded board, a third seat would go to someone Third Point had input on, and the fund would also have a say in choosing Campbell's next chief executive. Mark Clouse took that job in January 2019. Third Point got a fraction of what it first asked for, and a say in the outcome anyway. That is closer to the median result than either P&G's photo finish or Yahoo's near total concession.

The company gets a countermove too

None of this only runs in one direction. In 1982, Bendix Corporation, under chief executive William Agee, bought a majority stake in Martin Marietta in a hostile bid. Rather than negotiate its own sale, Martin Marietta's management borrowed roughly a billion dollars and used it to buy stock in Bendix itself, turning the acquirer into a target of its own takeover in the same month. Both companies briefly owned pieces of each other. The fight ended with Bendix absorbed into Allied Corporation, and Martin Marietta still standing under its own name. The tactic later got a name, the Pac-Man defense, after the arcade game where the hunted turns around and eats the thing chasing it. It remains rare for the reason it was rare in 1982: both sides spend down the cash they would otherwise need to run the business, win or lose.

Conclusion

Go back to the 42,780 votes. That number did not measure enthusiasm, or reputation, or which side had the better argument in the press. It measured exactly one thing: how many of two billion shares were pointed in each direction on a specific afternoon. Every tactic above, the stake, the letter, the lawsuit, the settlement, the countertakeover, exists to move that number before it gets counted, because once it is counted, the number is the only thing that has ever actually decided anything.