Bloomberg

By Ed Hammond

February 7, 2023 at 6:00 AM EST

At the start of January, Nelson Peltz returned from doing whatever billionaires do over the holidays and told Walt Disney Co. it stunk. That’s not verbatim. But when someone says you have “prominent cracks in the flywheel,” what else can it mean?

Activist hedge funds make their money by seeking out just such cracks. Their playbook, of which Peltz is a famed exponent, says that companies (read: share prices) can be improved (read: share prices can go higher.)

The whole process—storied corporations being picked apart by belligerent, publicity-hungry rich guys—can be the stuff of high drama, yet for the past few years it hasn’t been. The stock market was rising so high that activists struggled to find juicy targets among big names. Instead they went after smaller, weaker, more boring companies.

Barely a month into 2023, things look quite different. Hours after Peltz threw shade at Disney, Bayer AG, the German conglomerate behind everything from aspirin to weedkiller, found itself under attack from Jeff Ubben, the activist-turned-constructivist-turned-occasional-dissident- shareholder.

A few days later, Elliott Management Corp. announced that it held a stake in tech giant Salesforce Inc. (Ubben showed up there, too.) By the end of that week a third investor, ValueAct Capital, had entered the fray and, in addition to disclosing a stake, achieved something the others had not: winning a seat on Salesforce’s board for Mason Morfit, its chief executive officer. Together, Disney, Bayer and Salesforce have market valuations totaling more than $400 billion, and broad brand recognition that’s guaranteed to grab headlines. 

Big activism is back. Why? Rule changes and a fatigue with bad corporate governance play important roles, but as with so many things, it starts with money and good timing.

In the decade-plus leading up to the Covid-19 pandemic, activism went from a fringe investment strategy to mainstream corporate blood sport. That transformation—fueled by successful campaigns against big companies such as Procter & Gamble (Peltz), Canadian Pacific Railway ( Bill Ackman) and AT&T Inc. (Elliott)—attracted a lot of money.

Activist hedge funds swaggered into 2020 flush and ready to pounce. Then Covid happened. During a humanitarian crisis, it seems less cool to pressure companies to do things such as lay off workers or raise prices for roller-coaster rides. Activists seemed to understand that a more delicate approach was needed. They slowed down. Some even swore off activism altogether. Others focused on the smaller companies they could attack without drawing negative attention from the press and politicians.

So once the world settled into a new-Covid-normal, with activists still sitting on oodles of money, it followed that big activism would come back. Why didn’t it happen sooner? Well, coming out of the crisis, many of the world’s largest companies were as valuable as they’d ever been or near it, which made it harder for dissidents to complain about their shortcomings.

Those days are over.

Big Tech and Big Pharma—and pretty much all large corporations, except for Big Oil—have lost value over the past year. It’s now less expensive for activists to amass meaningful stakes pretty quickly, and their fellow investors are more likely to listen to new ideas about getting the stock price back up. And, according to the activists, there’s been a lot of questionable corporate governance going on while they were taking a break.

Salesforce is a good example. Seeking corporate strategy improvements, the world’s largest customer relationship management software company has included actor Matthew McConaughey and self-proclaimed “thought donor” and rapper Will.i.am in high-level business meetings, according to the Financial Times. In September, its co-CEOs took to the stage at the company’s Dreamforce conference, a yearly celebration of “the magic, the moments, the miracle of human connection,” wearing fluffy bunny ears.

These are the sort of things that investors might write off as zany or even visionary in a bull market, but can seem jarring when, three months later, you say you’re going to sack some 8,000 workers amid slowing sales growth. Similarly, when Peltz showed up at Disney with a $900 million stake and his eyes trained on a board seat, he portrayed the company as cartoonishly incompetent. In three short years, Disney had hired a new CEO, Bob Chapek; embroiled itself in a political row around LGBTQ+ rights; fired Chapek; rehired his predecessor, Bob Iger; missed earnings forecasts; and cut revenue guidance.

The company, Peltz said, was at a crossroads. It could carry on down the dark path of destroying value or let him Restore the Magic. (Yes, that’s the actual domain name he’s using to keep observers up to date on his campaign.) Disney has rejected Peltz’s critique, claiming his board experience at soap and ketchup companies doesn’t translate to the entertainment industry.

Activists like going after big companies in part because their sheer size means there’s more to aim at. Salesforce is a potential piñata. Elliott can use its stick to encourage job cuts, price increases, asset sales, share buybacks, executive pay freezes and cheaper cushions on the corporate jets. The possibilities are endless. And each one, in theory, makes the company—and Elliott’s investment—more valuable.

Big companies also give activists a degree of risk protection that scale provides. Peltz, who has wizardly vibes with his white hair and glasses, might honestly believe that the only way to make Disney’s board the happiest place on Earth is to give him a seat. No doubt he also knows that, flawed as the company may be, its stock is unlikely to go to $0 if he doesn’t get one.

The already favorable conditions for big activism were augmented last September, when the Securities and Exchange Commission introduced new rules governing board elections. The so-called universal proxy rules mean companies are now required to include activist nominations for board seats on the voting cards they send to shareholders.

Previously, activists had to mail out their own separate voting cards. It was a cumbersome and expensive undertaking, especially at large companies, which tend to have a high proportion of retail investors who own minuscule amounts of shares. Activists didn’t always bother trying to get to every possible voter. Now they get to do it on the dime of the company they’re fighting.

Taking on the biggest brands in America also serves an important marketing function for activists: It plays into their self-styled image of a David sticking it to a bloated Goliath, a strategic fudge that elides the reality that these antagonists are often several turns richer than those they antagonize.

It’s an image that can be hard to give up, even when it’s not your money on the line. Even Ackman, who said last year that he’s “permanently retired” from activist short selling (a pursuit he called the “noisiest form of activism”), hasn’t been able to resist needling from the sidelines in recent days. Weighing in on Hindenburg Research’s campaign against Adani Group, which has wiped tens of billions of dollars of value off the Indian conglomerate’s various entities, Ackman told his 603,000 Twitter followers that the attack looked “highly credible and extremely well researched.”

(Updates fifth paragraph to distinguish ValueAct’s board seat.)

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