Discouraging the Activists

In the 1980s and 90s, we had “corporate raiders.” Today, they go by the more respectable label of “activist investors.” While the branding has changed, their business has not. Hardly a day goes by without an activist investor (aka hedge fund) making public – sometimes via a link on Twitter – a letter remonstrating with management and the board for their failure to adopt this or that strategy for unlocking shareholder value.

Activist campaigns are now so pervasive that they virtually drive the corporate news agenda at major financial media. In this year’s Spring proxy season, more than 300 companies were under activist attack, comprising some of the largest and most well known issuers. Activist announcements routinely move the target stocks in double-digit percentages. (Not surprisingly, the activists have far more clout with reporters than any corporate communications department.)

Theories abound to explain why activism has become such a force in the current market. Some note that historically low interest rates let activists finance their positions on reasonable terms. Traditional asset managers appear more inclined than in the past to support activist campaigns, seeing them as an important contributor to market returns. And activists seem to be offering more thoughtful, well-articulated proposals than in the old “corporate raider” days, often focusing on winning a board seat or two.

Even in the midst of the boom in activist investors, companies are often caught off guard by attacks. They shouldn’t be. The activists’ strategic ideas aren’t usually new. They are ideas that have already been kicked around by the board, management, bankers and others who follow the company. The problem comes when the activist investor adopts one of these ideas as his own, grabs a stake in the company and mounts a PR campaign around this “strategic insight.”

Communications failures are usually the reason companies are caught “out” by such activist attacks. Some companies have done a poor job of explaining – on a continuing, systematic basis – why they’ve taken their current strategic path (and not the alternatives). Worse still, they may not have a systematic approach to identifying and assessing the concerns and doubts of the company’s key holders. Few activists succeed without broader support from traditional investors.

Stronger shareholder communications and public relations will put a company in much better condition to fend off attacks and navigate through the issues. Boards need to bear down on management to ensure they address these challenges. Sullivan & Cromwell offer sound counsel on these points in their recent report, “Adjusting to Shareholder Activism”

Bill McBride

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