Shareholder Activism: Is Any Company Safe?

Makovsky

In years gone by, activist investors targeted sleepy mid-cap companies, seeking to force change while unlocking shareholder value. Today, activist investors have set their sights on much larger targets such as Procter & Gamble, Apple, BP, ebay, PepsiCo, among others. All of this leads to the question: Is anyone safe?

A number of trends suggest that shareholder activism is here to stay and, quite possibly, will grow in the future. First, new hedge funds are appearing almost daily; this class of investor is believed have in excess of $100 billion in assets under management. Second, traditional money management firms such as Capital Group and Fidelity have shown an increasing willingness to support efforts by hedge fund activists.

Sooner or later, your company will find itself in the crosshairs of an activist investor so it might be a good idea to prepare for what might be the inevitable.

First, let’s understand what makes a company attractive to an activist investor. These investors tend to look for companies with strong cash flow, a low dividend, conservative balance sheets, entrenched management, recent underperformance, and capital-intensive businesses with assets that could be sold or spun-off.

In planning for an activist attack managements are advised to:

• Look in the mirror. Corporate managers should ask themselves: What makes us vulnerable? Are we lagging our peers in terms of cash flow, sales, earnings and stock price? Would we be better off selling off some of our underperforming assets? What are the strategic alternatives? How do we compare to our peers in terms of corporate governance? What would an activist do if he got control of our company?

• Know who owns your stock. Monitor what’s happening in your company’s stock and with your shareholder base. Keep an eye on your peers. Are your peers being targeted by activists, and if so, which funds and what proposals are being put forth? An increase in hedge fund investors, particularly those with activist tendencies, may indicate that they may be in the early stages of planning a campaign.

• Engage, don’t enrage. Ignore activist investors at your peril. Through greater levels of shareholder engagement, companies can build trust and establish constructive relationships with investors. Utilize board members in discussions with activist investors, particularly as it relates to matters of executive compensation. As a result, companies may be able to secure support for proposals that they put to a shareholder vote. In addition, companies stand to benefit by being able to identify and address potential issues before they reach crisis proportions.

• Establish a communications strategy. There are variations in activist investing. Some activists can be adversarial in nature while others seek to engage in a constructive dialogue with management. Calibrate your efforts accordingly.

• Put a team together. In the event that an activist threat escalates, your company will need a team of advisors to navigate the crisis. An investor relations firm, a proxy solicitor, a stock surveillance firm, an investment banking firm as well as outside legal counsel will be essential. Look for firms with experience in your industry.

Activist investors have been around for some time now. Dating back to ‘80s, these investors typically sought “greenmail” as companies bought out their positions for a premium. In addition to growing in numbers, today’s activists have greater war chests as well as the support of traditional institutional investors to force change at corporations. It is anticipated that they will remain a force to be reckoned with in the years to come.

– Scott Tangney

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