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The power of institutional shareholders is increasingly making itself felt on local publicly traded companies.
As was seen at Walt Disney Co.’s shareholder meeting last week, even Chairman Michael Eisner, usually accorded with deference for his enviable track record at the entertainment giant, finds investors sticking their noses into the tent.
Big institutional shareholders, of course, are not a new phenomenon, but it’s a matter of degree.
“The institutions continue to own greater percentages of public companies, because of the influx of capital into institutions,” said David Batchelder, chairman of La Jolla-based Batchelder & Partners Inc., an investment shop. (Batchelder was financier T. Boone Pickens’ right-hand man in many takeover wars in the 1980s, including the Unocal battle.)
Oftimes, only 10 to 20 large institutions control 40 percent or more of a company’s stock, note Batchelder and others.
Their influence is pervasive, if largely unseen.
At Chatsworth-based Great Western Financial Corp., just 15 institutions control more than 45 percent of the stock. If you go to the 20 largest institutions, they control more than one-half Great Western’s stock.
Something of a critical mass in many public companies has been attained in recent years as institutions gobble up more and more stock and then throw their weight around in boardrooms, often in a coordinated way.
“The result of such concentrations is that institutions really do have an influence, they have a much stronger voice than in the 1980s,” said Batchelder.
Moreover, changes in SEC rules mean that institutional owners now are allowed to talk to each other about a particular publicly held company, something that was outlawed in the 1980s and before, said Batchelder.
Harry DeAngelo, professor at USC’s Marshall School of Business, said that institutions have taken a page from the debt-financed takeover artists of the 1980s, such as Batchelder.
“They learned from the LBO (leveraged buyout) artists of the 1980s, who showed that tremendous value could be created by putting pressure on management. We have a market in the 1990s where management is held accountable to a much greater degree,” said DeAngelo.
How pervasive and concentrated now is institutional ownership in a “typical” public company? There are no records kept, according to the New York Stock Exchange and the SEC.
But here’s a glimpse into modern corporate stock ownership: The five largest shareholders in Great Western are also the five largest shareholders in its unwanted suitor H.F Ahmanson & Co.: Vanguard/Windsor Fund Inc. in Valley Forge, Pa.; Wellington Management Co. LLP in Boston; Putnam Investment in New York; Merrill Lynch Asset Management in New York; and Los Angeles-based Hotchkis & Wiley.
The big five control about 26 percent of Great Western and more than 38.5 percent of Ahmanson.
Viewed from this perspective, takeover wars in the local thrift industry or, indeed, most M & A; battles look like puppet plays controlled from Wall Street.
The shift from individual to institutional shareholder power has many long-term ramifications one upshot is that the day of publicly held corporation as private fiefdom is long gone.
The chairman and chief executive (often the same) is much more answerable to large, powerful and sometimes coordinated shareholders rather than a mixed collection of individual shareholders, none of whom has much clout (or often, savvy).
Institutional shareholders have pushed for such changes as management incentives tied to stock price a sexy idea 15 years ago, but which is now accepted as the norm.
In fact, what the institutions are saying about Disney is that such incentives got too rich, that there wasn’t enough oversight by Disney’s compensation committee (made up of board Disney members).
More than ever, management at publicly held companies are under considerable institutional shareholder pressure to boost profits.
“The institutional shareholders are increasingly focused on their returns, and they put pressure on companies to consolidate to cut costs,” said Eric Shunk, M & A; lawyer with Milbank, Tweed Hadley & McCloy in downtown Los Angeles.
Another upshot of big shareholder power is the incredible performance of blue chip companies in the last 15 years, a time frame in which the Dow Jones Industrial Average is up seven-fold.
Big blue-chip companies, as widely reported, have downsized for profit.
To be sure, the same institutional investors are causing some of the run-up in stock values by the very fact they are buying so heavily price-earnings ratios are at historically high levels.
It all spells institutional shareholder power. And this is one trend that can only continue, as graying baby boomers pour assets into money funds, in anticipation of the days they hang up their spikes.
Merger Mania
If you thought 1997 couldn’t get hotter than 1996, you were wrong. Take mergers and acquisitions.
In the first six weeks of 1997, there were 872 announced merger deals nationwide, with a combined dollar value of $67.2 billion. That’s well up from 691 deals and $42.9 billion in the like period a year ago.
And last year was an all-time record year for mergers, easily eclipsing 1995, which was the previous all-time record year, according to the Mergerstat, an arm of Houlihan Lokey Howard & Zukin, the Century City-based finance firm.
The numbers include all private and public company deals that were announced.
Well, maybe in 1998, things will cool off.
