Activist investors are knocking more loudly at banks’ doors. According to Thomson Reuters data, in 2015, activists launched 97 campaigns aimed at the US financial sector, 22 of them targeting banks.
That’s almost three times the total finance industry campaigns in 2009, when just eight efforts focused on banks. The number has increased every year since the 2008‒2009 financial crisis.
Activist hedge funds have historically steered away from banks, but with a six-fold increase in assets under management over the past decade and lasting areas of weakness in the banking system, these investors are broadening their scope.
Community banks and large regional lenders suffering from poor governance are tempting targets. Low interest rates and diminished returns, tougher regulations and, in some cases, exposure to energy-related loans are making small banks vulnerable to takeovers—a trend confirmed by a 58% rise in M&A activity among US banks last year.
“I am not surprised,” says Aswath Damodaran, professor of finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. “Companies run by imperial CEOs in businesses that they generate no value from and need prodding to change are classic targets. Who, in today’s markets, meets those criteria better than banks?”
Jeffrey Sonnenfeld, associate dean at the Yale School of Management, is, however, critical of activist investors, whose funds lost more than 6.1% in market capitalization in January, their worst monthly performance in three-and-a-half years, according to Hedge Fund Research.
“This shows the pathetic desperation of activist funds,” says Sonnenfeld. “With faltering performance themselves, the 6,000 funds and only 6,000 public companies have run out of targets. Due to regulatory pressures, riskier business and exposure to temporarily volatile complex global markets, the banks look vulnerable, but in most cases are managed much better than in recent past eras.”