[Preface: The purpose of this commentary is to provide a concise, high-level overview of shareholder activism that includes a summary of the current landscape, key findings from the investor survey and a primer on the importance of shareholder communications. This document is not intended to serve as legal advice, which should be obtained from counsel.]
Shareholder activists tend to target companies that are perceived to be under performing, to be sitting on too much cash, to have ill fitting strategies and/or to have ineffectual management teams. Many of these “extrafinancial” factors, which are outlined elsewhere in our analysis, have also become elements of the decision-making processes of institutional investors more broadly.
In the U.S., and increasingly in parts of Europe, investor activism continues to create pressure and drive change at companies. Over the past decade, publicly disclosed long positions controlled by activists have grown by more than $150 billion to $176.1 billion as of the end of June 2014, according to Novus, a research firm that provides data to investment managers and investors.
There has also been a recent shift in the types of companies that activists are willing to target. Whereas activists once tended to focus their efforts on small, underperforming companies, today many activists have turned their attention to some of the most well-known and respected brand names in Corporate America. Indeed, so far in 2014, activists have launched more campaigns at S&P 500 member companies than in any year prior, according to SharkWatch data, and prominent large-cap U.S. companies such as Amgen Inc., Apple Inc., and eBay Inc., among others, became targets.
Given the volume and decibel level of these campaigns, even a passive filing with the U.S. Securities & Exchange Commission by a well-known activist, with no other public commentary, will often be sufficient to generate media interest and market activity. Furthermore, the regulatory filings of activists and the ensuing media coverage also stimulate interest from other institutions, which can create a snowball effect of pressure on corporations.
The leading activists fully understand the importance of the public relations component of their campaigns and, like many U.S. corporations, they have begun to assemble their own teams of advisors including investments banks, law firms, proxy solicitors and public relations counsellors to assist in their efforts. Likewise, it is important for corporations that are under attack from an activist (or those that are vulnerable to an attack) to engage the appropriate advisory team to assist them with the necessary preparatory and inoculation activities.
Activism: Accelerating Pace and Global Focus
MSLGROUP’s first global survey of institutional investors shows that those investors expect the pace of activism to grow over the coming three years (77% of those surveyed). And while activism has predominantly been a U.S. phenomenon, with some forays in Western Europe, roughly 75% of those surveyed believe activism will become more global in nature. In the UK, the high-profile shareholder activism of 2012—known locally as the Shareholder Spring—centred primarily on pay and performance issues, exposing executive weaknesses with highly targeted and coordinated action. This new level of engagement by institutional investors in the UK resulted in the departure of several high-profile CEOs.
Corporations outside of the U.S. and the UK would be well-served to heed the lessons from the activist campaigns launched in these two markets over recent years. This includes understanding the important role that the proxy advisory firms such as ISS, Glass Lewis and others continue to play in providing third-party governance research to institutional investors far beyond the borders of the U.S. and UK.
Activist fund managers such as Elliott Management Corporation; Greenlight Capital, Inc.; Icahn Associates Corp.; Jana Partners LLC; Pershing Square Capital Management LP; Sandell Asset Management Corp.; The Children’s Investment Fund Management (UK) LLP; Third Point LLC; Trian Fund Management, LP; and ValueAct Capital Management LP, are included in a group of the 50 most prominent activists monitored by SharkWatch, and clearly they command significant media attention.
According to MSLGROUP’s proprietary research, however, almost 50% of investors surveyed believe that being well known is not a prerequisite for a successful activist campaign. While interesting, it may very well be that a bifurcation develops where lesser-known activists focus more on obscure, smaller companies while the major activists continue to shift their attention toward mega-cap companies—where a greater critical mass among investors is many times needed to achieve an activist’s goals.
The Benefits of Activism: Short vs. Long Term
The question remains: Do activist shareholders contribute to value creation? The evidence is mixed. MSLGROUP’s research shows that investors believe activists are more adept at creating short-term value (72%) rather than long-term value (64%). And 81% of the global institutional investor sample (85% in the U.S.) maintain that short-term gains achieved by activists may actually come at the expense of long-term shareholder value.
Nevertheless, the general attitude reflected in the survey does not necessarily signal how investors will act in any given situation. When faced with an activist campaign, shareholders will evaluate a proposal based on its merits and the company’s prospects and plans. All things being equal, however, it is reasonable to expect that many shareholders will favour a short-term opportunity over the potential for an undetermined reward further down the road.
Avoiding Communications Missteps
There is no single, universally effective response to activist investors. Every company is unique, with its own executive management team, board of directors and business performance, challenges and opportunities; and activist investors themselves come in many varieties. Ultimately, a tailored communications approach should be developed for each situation.
That said, there are a number of communication missteps that contribute to suboptimal outcomes in activist campaigns for corporations:
√ Failure to articulate how value will be generated
√ Reinforcement of perceptions that the board of directors or executive management team is entrenched
√ Divergent voices speaking for the Company, potentially creating a perception of divisions between management and board of directors and/or among members of the board
√ Personal attacks against an activist investor or appearing combative in the public arena about the situation
√ Assumption that the validity of your position will be heard and understood
√ Pursuit of actions that are inconsistent with a company’s strategic plan and those that appear designed to simply placate a particular activist
Engagement and Preparation is Necessary
In today’s environment of heightened institutional activism, corporations must be actively engaged in a dialogue with their investors and, in many situations, this involves undertaking a board-level assessment of potential vulnerabilities before an activist appears. When an activist does in fact emerge, the board and management team should:
(1) be united, (2) examine their corporate strategy and performance through the activist’s lens, (3) continually educate shareholders on the corporate strategy and how it will deliver the value shareholders expect, (4) communicate personally—shareholders need to know that management and the board of directors are listening and that they understand there are no “sacred cows” at the company and (5) cultivate relationships with key reporters and educate them on the merits of your position.
There is also a core set of communications principles that are relevant for most corporations dealing with an activist situation:
√ Demonstrate that the board of directors and executive management are committed to the best interests of all stockholders
√ Ensure consistent messaging that is focused and fact based
√ Candour can enhance credibility; where appropriate, acknowledge performance challenges
√ Communicate openness to constructive ideas and input from all shareholders (this does not mean accepting every idea)
√ Anticipate activist tactics and prepare potential responses
√ Reach out to largest investors, sellside analysts, media, employees and customers to ensure understanding of Company strategy and key messages
As the responses of the survey group and the views of a range of experts make clear, public company directors and executives need to be mindful in all of their key business decisions of the potential for shareholder activism. And, at the same time, they need to consider how best to communicate effectively with key constituents to ensure ongoing understanding and support. A tailored communications approach that adheres to these aforementioned principles represents a good starting point for many companies in this highly fluid activist environment.
If you would like to find out more about how MSLGROUP’s global Financial practice and its experts can help you, please contact Tom-Davies@kekst.com in New York.