Activist Investors and How To React When They Call
By K. Scott Wagner
Partner, Kerkman Wagner & Dunn

Like it or not, shareholder activism has become part of the corporate landscape. Once the domain of just a small group of hedge funds with under $12 billion under management, today the activist shareholder asset class has grown to over $200 billion, according to the Harvard Law School Forum on Corporate Governance and Financial Regulation.

The increased involvement of activist investors represents a basic change in the relationship between companies and its shareholders. And activist campaigns are increasing. No firm is too big, too powerful, or immune. In 2017, Whole Foods, General Motors, and Proctor & Gamble were targets of activist funds. And that’s just a short list of the many major corporations that were targets of activists funds.

With the mantra of “increasing shareholder value,” and “unlocking hidden value,” activists typically target companies with strong balance sheets and underperforming share prices.

And they don’t have to buy a huge stake of company stock to gain control. Trian Partners owns around 1.5 percent of General Electric. With that small stake, the activist fund convinced a majority of GE shareholders (along with management) to take specific steps to restructure GE’s business to boost its share price.

In less than two years, the CEO was forced to resign along with several members of senior management. GE share prices have plummeted. While the new CEO, John Flannery, has promised spinoffs of core businesses and significant cost cutting. Some analysts predict the company could even be headed for bankruptcy.

Today, it’s crucial for board members and management to be prepared for an activist campaign. The best offense is a great defense, and this means that a board and management should start to think like activists. Understand where the business has intrinsic value, and where that value could be a target for an activist.

Activist Scenarios

A typical activist shareholder strategy typically starts with a campaign to convince company management to take certain steps to change its existing business and financial strategy. The threat of a proxy fight for a seat on the board is a common activist fund tactic.

At some point, the activist makes a presentation to management and publishes a “white paper” that criticizes company strategy while presenting the activist’s recommendations and a revised business plan. It’s not uncommon for the activist to use the financial press and blogs to raise awareness of the plan (and why it’s so attractive) among institutional investors.

If they can’t convince a target company to agree, the activist might start a proxy fight to gain control of shareholders, replace the board, get a seat on the board, and typically replace management in the process, which is what happened with GE.

There is a positive side to activist involvement. In the case of GE, its gross margins were well below other conglomerates. Since the Trian takeover, GE has been forced to review its strategies, and get back to basics by instituting major cost cutting across the company.

But the bad news can’t be overlooked. Activists typically go for the short-term gains, killing off long-term initiatives, slashing salaries and jobs, while long-term investments, R&D and attempts to create innovative products are all but overlooked. In many cases, companies have been broken up, sold, or become merger targets.

Strategies To Handle Activists

  • Setup a small team of corporate officers, including legal counsel, a proxy soliciting firm, investment banker and a PR firm.
  • Strategize and meet frequently to prepare for an activist campaign. Be familiar with activist funds that have targeted firms in the same industry.
  • Ensure that the investor relations officer is accurately assessing any exposure to an activist attack or proxy solicitation. Maintaining regular contact with major institutional investors is crucial. Engage the CEO and CFO with portfolio managers.
  • Ensure the board of directors knows how to handle an activist threat. This means the board and management are united on key strategic issues. Activists often drive a wedge between the board and management.
  • Reassess and refresh the composition of the board. Activists often question the independence of board members who are over 75, or who have been on the board longer than 10 years.
  • Monitor stock trading and volume. Look for parallel trading and “wolf pack” trading. Keep track of Schedule 13D and 13G filings.

One of the best strategies is to listen. Be open and consider the activist analysis and their recommendations. There could be a great idea(s) presented that you and your team haven’t thought of.

If you have concerns or questions about how to create a plan to respond to an activist campaign, please contact Kerkman Wagner & Dunn. We have extensive experience in litigation regarding corporate structure and governance.