- We last checked in with the Overstock saga in early August, when CEO Patrick Byrne had announced that the company would pay a special dividend of a new “digital token” share class, which would require short sellers to either cover their positions or otherwise acquire the token share class…and reminded readers that, hey, if you want to drive out short sellers, that’s one way to do it. This story has gotten progressively more interesting over the last several weeks, and we don’t have the space to do it justice here, so we’ll simply point you to Marketwatch or Bloomberg’s take on the story, and, well, leave it there.
However, for us market watchers, it has given us an interesting case study on the short side of the equity market and its vulnerability to disruption. Sam Pierson of IHS Markit’s Markit Securities Finance group noted that the transaction announcement did create a sudden drop in shares on loan over the week, with a 3.2mm share reduction in shares on loan since September 6th, leaving 10.6mm shares on loan. However, the interesting part is that even with the sharp decline, borrow costs continued to drift higher, and even after the short covering, OSTK remains one of the most expensive-to-borrow US equities overall. There are media reports that lending desks are accepting cash instead of the new token in return, and it’s entirely possible that regulators will step in and curb future use of this tactic. So, no, don’t try this at home…but it’s worth keeping an eye on not just the long but the short side of the market for your stock too.
- Does shareholder activism drive long-term shareholder value? The question has been asked around the IR community for years and continues to be a debate amongst experts within the field. On one hand, advocates argue activism unlocks shareholder value through necessary corporate actions such as board/management changes, share buybacks and mergers or acquisitions. Conversely, opponents believe activism impairs a company’s operational performance.
According to University of Washington’s Ed deHaan, Stanford’s David Larcker, and Chicago Booth’s Charles McClure, both opinions are incorrect. In their study, Long-Term Economic Consequences of Hedge Fund Activist Interventions, the authors examined ~2,000 activist campaigns from 1994 to 2011 and concluded that shareholder activism has a negligible effect on operating performance or long-term stock prices. Further, activist campaigns only have a positive correlation on share price for micro-cap companies, with an average market value of $22 million. “Our findings do not strongly support arguments that activist interventions drive long-term wealth for the average investor. At the same time, we find no evidence that activist interventions destroy value, so our findings also fail to support critics’ proposals to restrict activism.” (Matt Esposito)