Moira Conlon is the founder and CEO of Financial Profiles, a national strategic communications firm that builds long-term corporate value.
Activism has been around for so many years now that it continues to amaze me when companies are surprised and unprepared when an activist attack happens.
Last year, there were 235 shareholder activist campaigns at companies with market caps over $500 million, a 36% increase from 2021 and the busiest time for activists in the past four years. Those numbers are expected to rise significantly in 2023 as companies face myriad challenges, including low valuations, fears of a recession, inflation, higher operating expenses, rapidly rising interest rates, continued market volatility and limited access to attractively priced debt and equity capital.
At the same time, the activism landscape continues to evolve due to changing economic conditions, the adoption of new universal proxy rules, climate change and sustainability, the emergence of activists targeting special-purpose acquisition companies, the uptick of first-time activists and the prevalence of swarming—activist campaigns involving more than one activist with different intentions
The media makes us aware of activist campaigns that target large, name-brand companies, but it’s worth noting that estimates indicate up to 80% of activist campaigns are focused on small-cap companies.
Against this backdrop, companies of every size and sector should assume a “when” not “if” mindset and be fully prepared when an activist comes knocking on their door.
The drivers and trends change, but ultimately, regardless of what activists are advocating for, they’re focused on unlocking value. They have their own return targets and timeline for achieving them, and their plans often don’t align with yours.
As with most things in life, it is easier, more effective and less costly to preempt an issue than to deal with its aftermath. The same logic applies to activist attacks. Here are some recommendations for making sure your company is in the best possible position to avoid or effectively manage an activist attack.
Recognize that many activists are smart investors with valid ideas.
Objectively look at your company through the lens of an activist investor and ask these hard questions:
- How do your valuation and performance stack up to those of your peers?
- Do you have a thoughtful strategy for value creation and a track record of delivering returns?
- Do you have excess liquidity or assets on your balance sheet that generate no return?
- What is your capital allocation strategy? Is it the right one in the current environment? Are the acquisitions you made accretive?
- Would you have a higher valuation if you changed your outlook (i.e., shortening your timeline to profitability or cash needed to reach breakeven)?
- Would your company be better positioned to create value as part of a larger company?
- Could you generate higher returns if you divested a business segment?
- With the new universal proxy rules, do you have the right board members with relevant skills and experience, individually and collectively?
- Are your corporate governance practices in line with rapidly evolving best practices?
- Do you have an ESG/sustainability story?
Remember, a good offense is your best defense.
A thoughtful investment narrative, best-in-class investor relations program and strong investor relationships are critical.
Craft your investor narrative with an activist point of view in mind. At least annually, and in times of changing economic or market conditions, step back and evaluate your investment story and your investor relations program and practices.
The year-end reporting process is an ideal time to assess your company’s performance and progress for the past year and set the stage for the year ahead. Refresh your investment messages and make sure you have a defensible, understandable and compelling story to tell that clearly communicates your sustainable competitive advantages and explains how you’re creating value.
Tell your story frequently and consistently. Be forthcoming, even if you’re in the first year of a three-year turnaround. Make sure key investment messages are consistently and prominently incorporated into all investor communications: investor presentations, earnings call scripts, shareholder letters, your investor relations website, SEC filings and proxy statements.
Build and maintain strong relationships with investors.
If your investors don’t know you, haven’t seen or heard from you lately or don’t fully understand your strategy for value creation, it’s a lot easier for them to side with an activist, who contacted them about their own compelling value creation agenda.
Both active and passive investors participate in activist campaigns so it’s important to communicate with both groups while recognizing that their information needs and engagement practices are very different. If you’re worried about an activist attack, stock surveillance can be a helpful tool.
Proactively work with the sell side to advocate for your company.
Make sure your analysts understand your company and your investment thesis and can effectively market your stock. If you don’t have a champion analyst or two in the mix, make the effort to cultivate one.
Leverage strong market intelligence to stay abreast of issues.
On an ongoing basis, monitor the evolving activist landscape—both in general and as it relates to your sector.
Understand the types of issues that activists are raising and how your company might be impacted by them. Read sell-side research on your company and peers with a focus on commentary related to the issues activists care about. Watch for shifts in sell-side sentiment, ratings and price targets.
Track research on your competitors to see how they are viewed, valued and discussed relative to your company. Listen closely to the questions investors are asking at meetings and on earnings calls and the feedback they provide. If you don’t have a solid handle on how your company is viewed, now might be a good time for a perception survey conducted by a neutral and experienced third party.
The job of an activist is far more difficult when faced with a company that is self-aware, credible and prepared. Today, every company should have an activist defense plan in place to avoid being caught off guard and to ensure the best possible outcome for all stakeholders.
Topics from this blog: Thought Leadership