They are still coming and they have greater resolve than before: activist shareholders armed with a better idea of how to run your company, or at least of how to extract more cash from it. And they are not just the high-profile Carl Icahns of the investment world; rather, they are more likely familiar faces.
In other words, some of your former friends could become your foes. With severe investment losses tarnishing fund performance records, these investors find themselves having to take more aggressive measures in order to outperform their benchmarks.
One way to unlock greater shareholder value is to effect structural change through cost cutting, asset sales and debt reduction. And while many companies today are undergoing these types of initiatives, the pace may be too slow for certain shareholders.
The temptation is for management to respond to activist shareholders with the kindness of Groucho Marx, who famously said, “You know I’d buy you a parachute if I thought it wouldn’t open.”
However, cooler heads and a constructive dialogue with your current owners will be much more productive. You can scan the weekly Securities and Exchange Commission 13D filings to see that activist shareholders are still on the warpath.
In the words of one investor group who recently filed, they believe that the stock in question is trading “at a significant discount to the company’s true value and that the discount is due to investors’ lack of confidence in the current board’s ability to deliver value to shareholders.” This is the catch-all wording that aims to hold management accountable.
COMMON CHARACTERISTICS OF ACTIVIST SHAREHOLDER TARGETS
One might assume that activist investors only target troubled companies in distress. However, empirical evidence actually confirms the opposite notion. Although somewhat counterintuitive, activists seek “successful” but undervalued companies with cash-rich balance sheets accompanied by low debt levels. Other characteristics include:
• Management team that lacks investor support or confidence
• Excessive compensation structures
• Minimal management/insider ownership
• Recurring revenue streams
• Strong cash generating ability
• Significant hard assets
• Underperforming, under-leveraged, and/or undervalued assets
• Excess overhead
• Depressed equity valuation
• Earnings underperformance
• History of reporting, accounting or governance issues
• Large institutional investor base
• Dispersed ownership
TYPICAL ACTIVIST SHAREHOLDER DEMANDS
Activist investors are not operators; instead, they are focused on receiving a concession or putting a company in play in order to unlock shareholder value in the firm. Activist demands usually include:
• Board seats
• Stock repurchase program
• Increased and/or special dividend
• Divestitures or spin-offs
• Sale of the company
• Improved corporate governance
• Better financial terms in a merger scenario
You can be sure that an activist investor has done the homework and has a specific plan of attack, with a communications arsenal to win the support of the majority of shareholders. Sometimes people just want to be heard. That’s why the “say nothing” approach often motivates the activists to try harder. Your best move is to pick up the phone and arrange a meeting with the investor. Without this dialogue, you severely limit your options for controlling the public discussion that is likely to follow.
You will also discover if the actions proposed are more of a one-time event to generate cash to be returned to shareholders, or if they are more strategic in nature relating to business strategy and capital allocation. A well-known activist was targeting restaurant stocks a few years ago and, to no surprise, was pursuing a similar value-creation strategy for our client. An open dialogue with this investor allowed management to be proactive in taking steps to recapitalize the firm on their own terms.
AVOID BECOMING AN ACTIVIST SHAREHOLDER TARGET
Implementing a strong financial communications program is the best defense against shareholder activism. In today’s challenging environment, we recommend being more proactive than ever by taking extra steps to review your company’s “report card” on value creation and the perceptions of your key stakeholders.
First and foremost, have you evaluated the structure of your board of directors to ensure the strongest corporate governance, as weakness in this area is often the first point of attack for an activist? Have you touched base with your top shareholders to solicit feedback and glean intelligence on investor viewpoints, both positive and negative? Have you prepared a strong statement that could be shared with your employees and the media immediately if something were to develop on the activist front in the public sphere?
Bear in mind that a short-term fix proposed by an activist investor is not always in the interest of your long-term shareholders and therefore is not likely to garner enough support to force a change. However, if an activist has a bone to pick regarding your strategy, it’s very likely that some of your other top owners share similar concerns.
While most companies will never have to be paraded up to Capitol Hill to explain the state of their industry, every CEO can expect to be grilled on their company strategy and how it will build shareholder value.
In the challenging environment that we face today, avoid hiding behind the macroeconomic challenges by going “radio silent.” Rather, be vocal and maintain constant communication with your core investor base.
Remember that long-term shareholders are on your side, wanting the best future for your company, too. Just be on guard, however, for more aggressive dialogue from your investor base. You never know if they will be friend or foe. PRN
CONTACT:
Claire Koeneman is president of MWW Group’s Financial Relations Board. She can be reached at [email protected].