Why Activist Investors May Be Bad for Corporate Credit

The financial media is enamored with the more well-known activist investors. After all, they are very vocal, controversial and adversarial, and they can be extremely entertaining compared to most traditional business news. There may be a dark side to all of that activist investor chasing though. A new Moody’s report suggests, or warns, that shareholder activism continues to rise and that this trend could have negative implications for credit investors.

Moody’s analysts found 54 cases of shareholder activism across North American non-financial companies in the first three months of 2015 alone. For a comparison, that is up from 43 cases during the first three months of 2014. And 2014 another record year for activists, with 222 cases of companies being targeted by activists, up from the prior record of 220 in 2013.

24/7 Wall St. has watched and analyzed many of the activist investor efforts in recent years. In many cases they are great and create win-win scenarios. In other cases, let’s just say that the efforts only aimed to get a stock pop today without a care about what the implications are down the road after they have exited the companies.

Getting companies to buy back stock, increase dividends, pare off non-core assets, split the company up into units and other metrics can all be good for shareholders now. The warning from Moody’s is that many activist efforts can be very bad for corporate credit quality.

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Moody’s has indicated that this steady rise in shareholder activism could raise event risk for credit investors. At issue is that those efforts can change a company’s strategic direction, or they can change or alter their financial priorities.

So, what is the driving force of activist investor fears ahead? Moody’s showed that over 40% of the 2015 activist targets were also targeted in 2014, suggesting that activists will continue to keep up the heat. Moody’s said:

In 2014, activist shareholders succeeded in challenging managements and boards at some of the largest US companies, pushing them to make sometimes transformational changes. No company is immune — and in recent years, blue-chip firms like Apple, DuPont, PepsiCo and General Motors, among others, have become targets, … Shareholder activism is rarely good news for credit investors, and we have seen an uptick this year. In many cases, shareholder activists pursue short-term initiatives like share buybacks or special dividends, which have negative implications for credit investors.

Investors are enamored with the size and scope of the technology sector. After all, it is technology that dazzles consumers every day. Unfortunately, Moody’s warned that the technology sector continued to be the most prone to activists. The warning showed that the tech sector made up 30% of North American companies targeted since the start of 2015 alone. Other sectors highly targeted by activists are services, health care and retail.

So, what should investors think about activist investors in 2015 and 2016? It seems a safe bet that activists like Bill Ackman, Nelson Peltz, Carl Icahn and a couple dozen other top activist funds probably will not slow down just because a credit ratings agency identifies their efforts as posing credit risks. Stay tuned.

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