Shareholder activism is on the rise, and this is generally a negative for corporate credit quality, says Moody’s Investors Service in a new report.
The rating agency says that shareholder activists are taking on an increasing number of companies, and larger companies, in campaigns that are typically focused on returning more value to shareholders. These efforts have usually been negative for credit quality, it notes.
In its report, Moody’s says hedge funds and other activist investors pursued 220 targets in 2013 in either proxy contests or public filings; and, this is up from 209 in 2012 and 179 in 2011. It notes that the tech sector continues to see the most shareholder activism, accounting for a quarter of all campaigns in 2013.
“With their large cash balances, minimal debt levels and small, if any, dividend payments, technology companies will continue to be targeted by activist investors calling for more aggressive capital returns,” says Chris Plath, vice president and senior analyst at Moody’s. “Among the most vulnerable are companies with low valuations resulting from lagging performance or those that have valuable assets that can be sold-off or spun-out into a separate entity.”
Other attractive sectors for activists include healthcare, energy and retail, it adds.
Moody’s says that the primary reason for the increase in shareholder activism is “the lure of tremendous piles of cash” sitting on corporate balance sheets. Also, companies have access to inexpensive debt, “which makes it easier to leverage balance sheets to fund share buybacks, special dividends and other shareholder rewards,” it says.
Additionally, Moody’s notes that the public perception of activists has become more positive in recent years, as they have gradually shed the image of “corporate raiders” that they had in the 1980s, and come to be seen more as agents of longer-term change for the good, albeit primarily for the benefit of shareholders much more than bondholders.
“The majority of activists’ efforts are focused on advancing shareholder interests, which tend to be negative for bondholders, “says Plath. “There have been some instances where they have helped credit profiles by imposing greater financial and capital discipline or focused on a company’s corporate governance practices.”
In addition to possibly adding leverage to fund these shareholder-friendly initiatives, the rating agency says that the increased activism can hurt credit quality “by encouraging potential targets to act preemptively” with share buybacks or special dividends designed to prevent activist campaigns.