The Activist Investor Blog
The Activist Investor Blog
Effective Activism, on the Cheap - 2013 Update
In 2010 and 2012, we set out to determine a way to improve the odds of success, and to lower the cost, of activist investing.
At the time, we put together an analysis that, with some standard and novel screens, identified 36 and then 26 undervalued companies that fit the profile needed to pursue what we’ve come to call “Effective Activism, on the Cheap.”
We’ve now updated that analysis, and identified 26 new companies that fit the criteria.
What happened since 2010?
In 2010, some of the results surprised us. A simple valuation model indicated that on average the share price for the 36 companies could appreciate 75%. Also, the companies sat firmly in the small- to mid-cap space, with an average market cap of $375 million.
Since then, investors undertook activist projects at ten of the companies. Another four were acquired. For the 36 companies, share prices increased an average of 48% in the three years since that first analysis. That falls within the range of benchmarks for small cap companies.
As for the 26 companies identified in 2012, at the time we estimated that they could appreciate 57%. In the last year these companies increased an average of 41%, above the benchmarks for small cap companies.
2013 Portfolio of 26 New Companies
We used the same criteria for another analysis today:
❖highly-undervalued, measured by current net worth and book value relative to market capitalization
❖good activist candidates, measured by low insider ownership and high ownership among the top ten institutional investors
❖potential value appreciation, measured by a simple valuation using free cash flow and current net worth.
In this way, we identify 26 new companies, with a similar profile as the 36 from 2010. On average, at these companies:
❖current net worth of 124% of market capitalization
❖book value of 118% of market capitalization
❖insiders own 3%, and the top ten institutions own 52%
❖discount to potential share price of 39%, implying 64% potential share price appreciation.
Relative to the earlier analyses, the value potential of this group of 26 companies is slightly smaller, while the potential price appreciation is slightly greater.
What’s a fund to do?
The analysis also illustrates how this approach can make a different to investors, particularly fund managers that collect fees for management and performance. Spending relatively little, say under $100,000, on an activist project, makes a vast difference relative to the standard cost of $500,000 - $1 million or more. Assuming 64% share price appreciation, an average investment of about $15 million, and customary fees, we estimate that the effective approach, on the cheap, can eliminate cost as an obstacle to an activist project.
Now, the strategy isn’t objectively easy – no activist program is. Management still holds many of the cards. They can spend company (shareholder) money to seek support from shareholders outside of the top ten investors, and can communicate with shareholders in ways that investors cannot.
Still, for the right companies (such as these 26, and perhaps others) this approach should make it easier for an investor to have an impact.
Tuesday, October 15, 2013