Corporate raiders back in the 1980s?

For the most part, I liked them. Sure, Gordon Gekko was a lizard, but he talked some sense. As for today’s version of the raiders, rebranded “activist investors,” I generally believed they carried out a needed function.

But now? Not so sure.

The big difference these days is that the activists, apparently having run out of moribund companies to attack, seem to be going after good companies.

Angelenos don’t have to look far for examples of what I’m talking about. Allergan in Orange County was pressured by activist William Ackman, and it agreed a couple of weeks ago to sell itself. And Amgen in Ventura County has been lobbied by activist Dan Loeb to cleave itself in two, with one company to market established drugs and the other to bring new drugs to market. Amgen has resisted that, but in a furious cost-cutting move to boost its stock and hush the raider, it said in late October it would ax 1,100 jobs in addition to 2,900 cut earlier.

These are (were?) good companies. And these moves were made for the wrong reason: not for strategic growth but out of desperation. It’s hard to see how stockholders will benefit long term from Allergan’s shotgun wedding or Amgen’s loss of some 20 percent of its staff. The only apparent beneficiaries are Ackman, who figures to make $2 billion from Allergan’s sale, and Loeb, who stands to make a tidy sum from the bump-up in Amgen’s stock.

Writing in the New York Times’ Dealbook section two weeks ago, Bill George noted this disturbing trend in which “activists have recently shifted their focus to America’s best companies.” He said attacks on good companies may yield handsome profits for the raiders and the hedge funds they manage but “it places the competitiveness of America’s great global companies at risk.”

George, now a management professor at Harvard Business School, may be naturally sympathetic to the target companies because he is the former chairman and chief executive of Medtronic. But he made a good point in that Amgen has been a “stellar performer” and the breakup that Loeb wants may yield short-term profit but is long-term silly.

“Break it up? It’s all one business,” George wrote. “Mr. Loeb’s idea of splitting older drugs from newer drugs would destroy one of America’s most productive innovators by taking away the cash it needs to develop new drugs, meet patient needs and fuel the company’s growth.”

As for Allergan, George wrote that it spends 17 percent of its revenue on research and development. “These smart research investments have sustained the company’s high growth rate. Valeant’s strategy was to cut Allergan’s research spending to 3 percent of revenue.” That would save millions now but it would eventually render the company “noncompetitive.”

Why this surge in targeting sound companies? Hedge fund operators like Loeb and Ackman have more money to put to work than ever before. At the same time, we have fewer public companies. And since there’s a limited number of marginal, bloated companies for activists to attack, they’re left with the good companies to squeeze.

This is a distinct change from the past. Raiders used to mainly target perennial underperformers, firms on errant strategic paths or companies with entrenched managers and directors who had busily enriched themselves. Those companies needed to be shaken up. Were there excesses by the activists? Absolutely. Bad results? You bet. But the raiders generally administered a much needed form of rough justice, a kind of town marshal for the Wild West of Wall Street.

“But in the case of strong companies with effective managements, activist attacks are enormously distracting,” George wrote in his New York Times piece. “Executives focus on saving their companies and short-term financial moves, instead of winning global competitive battles, creating great products and building new businesses.”

Indeed, Angelenos don’t have to look far to see the damage from today’s version of activism. One strong company will become a subsidiary. Another may well emerge weaker and with an uncertain future. Hard to see the benefit.

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].