The pandemic has stalled activist investors, but for how long?

Ortenca Aliaj

When coronavirus struck the US in March, even a group of investors that has earned the unenviable nickname vulture capitalists were reluctant to publicly attack companies reeling from the effects of the global pandemic. 

Activist investors, who acquire stakes in companies and seek to force them to make changes in order to improve shareholder value, have largely remained on the sidelines this year. 

Prior to the pandemic, activist investors were on track for a record-breaking year with $13.1bn deployed in January and February, but new campaigns fell to a multi-year low in the months that followed, according to data from investment bank Lazard. 

Deterred by the volatility that gripped global markets in the early days of the pandemic and the likely public backlash of trying to capitalise on a global health crisis, activists focused on their own war chests. 

But as the 2021 proxy season approaches, a time during which most companies hold their annual meetings where activists can propose changes for shareholders to vote on, executives once again have to think about who is on their shareholder register. 

The market rout presented an opportunity for activists to build up stakes in companies at cheaper prices following the longest bull run in history. Now that markets have staged a recovery and companies have largely found their feet, it appears activists are once again ready to take centre stage. 

During the third quarter, Trian Partners, the hedge fund run by Nelson Peltz, disclosed three new stakes. The New York-based activist had for months kept its positions a secret while it bought up shares in media conglomerate Comcast and asset managers Invesco and Janus Henderson. 

Within weeks Invesco had agreed to give Trian three board seats and said it was working with the firm to improve performance. 

More recently, hedge fund DE Shaw and Engine No 1, a newly launched activist investor, have called for changes at ExxonMobil, backed by large institutional holders such as the Church of England and the California State Teachers’ Retirement System.

Struggling sectors, such as asset management and energy, are popular with activists who are on the hunt for “shiny objects,” as Allison Bennington, a partner in the strategic advisory practice at PJT, calls them. She predicts that 2021 is going to be a busy year for activist investors. 

“Activist funds, for the most part, have not performed well this year,” she said. “Therefore, there is a lot of pressure from investors in activist funds to make up for lost ground in 2021, which I suspect will lead to more aggressive actions and more of it.”

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Masayoshi Son and the faulty crystal ball

In fairy tales, a crystal ball can be many things: it can reveal the future, but it can also be a malevolent charm. The former rather than the latter is what Masayoshi Son had in mind in 2016 when, after paying $32bn to buy Arm — the most aggressive gamble of his life at the time — he described the UK chip designer as “my crystal ball”. 

As an investor obsessed for decades with the evolution of communications and software, the SoftBank founder had just bought a company through which he believed he could see the future of every trend in computing, artificial intelligence and the internet of things. 

The idea that he possessed magical insight became a formidable tool for one of Asia’s greatest salesmen. It was a pitch that allowed Mr Son to attract billions of dollars from Middle Eastern investors with the promise of betting on the start-ups that would dominate centuries into the future. 

Project Crystal Ball, after a quick rebranding, was introduced to the world later that year as the groundbreaking $100bn SoftBank Vision Fund — and its new Gulf backers demanded that a portion of Arm be put in the portfolio. 

But four years later, Mr Son’s crystal ball has yielded few results. Under SoftBank’s ownership, Arm failed to thrive. 

And the Vision Fund’s performance has been unremarkable. According to the fund’s own valuations, in November, its $75bn investment in 83 start-ups was worth $76.4bn. 

Meanwhile, other chip companies did much better than Arm. 

One of those, US-based Nvidia, was worth only $30bn when SoftBank acquired the UK company.  

But by the time Nvidia decided it was interested in acquiring Arm in the summer of 2020, its market value had surpassed $300bn. 

It’s not a done deal though. UK politicians are clamouring for commitments from Nvidia to keep some of Arm’s operations in Britain longer term. 

The transaction will also require clearance from places such as China, which may look to scupper the deal as part of its ongoing spat with the US over sensitive technology.

The sale of Arm has cemented Mr Son’s transition from an operator focused on the telecoms and tech industries to one who is a global manager of assets. And while Mr Son has not publicly discussed the sale of the chip designer, the chief executives of both Nvidia and the UK group have defended the deal as a continuation of his technology bet in the era of AI.

Ultimately, assessing scale rather than the type of business it has become may be more useful in defining SoftBank. Mr Son, says one SoftBank executive, will continue to run a company that defies easy description until it is of a size where it can straightforwardly be numbered among the 10 most valuable on the planet. Mr Son himself has been explicit about the link between market value and the company’s “significance to humanity”. 

When he was unveiling the company’s 30-year plan in 2011 and asking for the market to accept yet another reinvention of SoftBank, he stressed how critical market capitalisation was to that process. 

“In every age, the top 10 list includes companies that were the most needed by people at that time. In other words, these companies provided functions that were indispensable to everyone. This means that market capitalisation can be considered to be a standard global yardstick for gauging how much people need a company,” Mr Son said at the time, making his desire to enter the global top 10 an explicit target. 

Today SoftBank barely scrapes into the top 100. That is partly due to being listed on the Japanese market and also the discount at which its shares trade compared with the massive value of SoftBank’s assets. Yet, if Mr Son wants to know when and how the group can achieve his top 10 ambition, he may need to find a new crystal ball. 

See how Masayoshi Son’s crystal ball failed to live up to expectations with this video from Arash Massoudi, the FT's corporate finance and deals editor.  

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