The recent volatility in the stock market continued Tuesday, as worries about the Federal Reserve's future moves on monetary policy led to a reversal of some of yesterday's gains. Yet as chemical giant DuPont (NYSE:DD) led the Dow Jones Industrials (DJINDICES:^DJI) downward by nearly 175 points as of 11:30 a.m. EDT, the bigger question is whether activist investors seeking to drive change at some of the largest companies in the world will ultimately help or hurt their fellow shareholders by moving share prices. As topsy-turvy markets make relative performance more important, companies could soon find themselves in the crosshairs of activist investors seeking fast returns.
What activists want to see
DuPont fell over 3% this morning, following yesterday's slump of more than 4% after its recent fight with activist investor Nelson Peltz and his Trian Fund Management hedge fund took a turn for the worse. Last week, management rejected Trian's demand to name two nominees to DuPont's board of directors and two more for the board of the company's performance chemicals business, which it expects to spin off as an independent company later on this year. Yesterday, a key analyst downgraded DuPont, as those following the stock worry the company has become overly distracted by Trian's proxy campaign and that it should instead pay more attention to its key agricultural and chemical products businesses.
One point of contention between Trian and DuPont involves just how far the company should go to unlock shareholder value. Even with the performance chemicals spinoff, Trian would prefer also to see DuPont's materials business split off from those divisions with the highest growth potential. Given how well agricultural and fertilizer products have done across the industry, having a separate ag unit could well be the best way to maximize the total value of Trian's investment in DuPont.
How activism could spread
The interesting thing about activist investors is the amount of influence they can wield even with relatively small positions in a company. Trian owns less than 3% of DuPont stock, yet it wants two spots on a 14-member board. DuPont's resistance seems reasonable given the disparity between Trian's true influence and what it is seeking.
Yet DuPont's experience could easily spread throughout several portions of the overall economy, invigorating activist-investor activity in many sectors. Caterpillar (NYSE:CAT), for instance, is down 1.6% today, and it has also struggled as falling commodity markets reduced demand for its heavy equipment. After pursuing a corporate strategy of acquiring companies such as mining-equipment specialist Bucyrus to widen its equipment offerings, Caterpillar must deal with cyclical downturns in all of its divisions at the same time, with only the U.S. construction industry showing any true signs of strength at the moment. As its stock hits lows not seen since 2011, Caterpillar could easily be the next to attract negative attention from activist investors seeking a better path forward for the company. Similar moves could occur throughout the flailing energy industry, and if the stock market's volatility turns into an outright decline, activism could bloom widely.
Activist investors typically have their own agenda, and while shareholders can benefit from the resulting interest in a company, you also have to watch closely to see exactly what the company does and why. If rising levels of activism distract corporate managers from the task at hand of raising shareholder value, then they could prove to be a net negative for investors in the long run.