There is an old Wall Street saying that the market takes the escalator to the top and elevator on the way down. We saw this play out in real-time in the first quarter as fears of the COVID-19 pandemic spread. In the media, we saw the emergence of the popular campaign, #Alonetogether, which intended to help slow the spread of COVID-19. The phrase would indicate that we are all in this together while working from home. Will this same phrase hold true for activists? Will they give companies the benefit of the doubt in this current environment?
After the 2008 financial crisis, we saw over 260 proxy contests over a 2 year period including an all-time record in 2009. Does this portend that a similar resurgence of activism is on the way? The early take was this environment was quite different from previous market declines and investors would be more patient as senior executives were simply trying to keep their companies afloat and employees safe.
In late March, we saw signs that activists could actually be softening their stances. Carl Icahn agreed to end his campaign to remove the entire board at Occidental Petroleum, settling for 2 seats. Starboard Value came to terms with Box and Elliott Management removed its opposition for Capgemini SE’s bid for Altran Technologies SA. Overall we saw a 38% decline in campaigns from February to March.
Will this trend continue?
Given all the uncertainty, it may be very difficult for activists to drive improved shareholder returns in the current environment. Many of the tools in the activist’s toolbox, like M&A, stock buybacks, and dividends are currently the reason why many of the companies in the activist crosshairs may be struggling. Companies spent years leveraging their balance sheets to buyback stock and now find themselves suspending dividends and looking to raise cash to help weather the storm.
Activists may also find it difficult to criticize a company’s performance and management strategy. After Starboard nominated directors to the board of eBay, the company said it was disappointed that Starboard decided to announce its nominations “amidst the global Covid-19 pandemic while the board and management are trying to focus on the business, employee health and safety and the important CEO search and portfolio review that are underway.”
Companies are not waiting to find out
Through May 1st over 50 poison pills have been adopted by U.S. corporations. That compares to just 31 for all of 2019 and an average of just 27 a year over the last 10 years. While there is uncertainty on how successful activists will be in this environment, there is little doubt that boards are preparing as though they will.
According to CNBC, shareholder activism tends to thrive after market selloffs. A couple of reasons for this include:
- When stocks are down 20% to 40% it gives value investors like activists a plethora of new opportunities to choose from. Many companies with depressed valuations can become irresistible targets for strategic buyers.
- While a rising tide may lift all boats, it is much harder for poor management to hide in a down market. When shareholders are underwater, it is easier to get support for activist campaigns.
Who is at risk
When we look at the worst performers this year, the list is led by energy, banks, and consumer discretionary stocks. Given this backdrop it didn’t take us long to find examples of activists already engaged. Through last Friday, Occidental Petroleum was the worst performer in the energy space since the first reported case of COVID-19 in the U.S. and as mentioned earlier became an activist target by Carl Icahn in early March.
With most restaurants closed for business, it is also not surprising to see the consumer discretionary sector as a laggard in the current environment. To that end, activist hedge fund Pershing square increased its position just under 10% on May 5th in Restaurant Brands International and filed a 13D, unveiling plans to engage in discussions with management and board of directors about ways to enhance shareholder value. This included management, operations (including cost structure), assets, capitalization, financial condition, strategic plans, governance, and board composition. Can we expect to see more of this activity in the coming weeks?
How can IROs navigate this market
While there is no universal checklist, as the circumstances of companies and the behaviors of activists vary wildly, there are certain things a company can do to prepare. I connected with seasoned IR professionals Matt Tractenberg and Karen Greene to get their thoughts and advice on how to successfully navigate this new terrain.
“Shareholder activism is in uncharted waters and the ultimate impact of COVID-19 on shareholder activism is largely uncertain,” said Karen. “Companies should prepare themselves for the possibility that they will be targeted by one or more activist investors.”
Matt added, “IROs should remember that they are tasked with presenting a pragmatic and honest view from an outside perspective. Focusing only on corporate strengths may result in you being ill-prepared when/if an activist knocks on the door. Our advice: take a long look in the mirror, and put yourself in their shoes.”
When it comes to identifying a company to target, Matt says that activists are generally looking for a hook; something they believe is negatively impacting valuation and can be remedied with their help. Karen added that “companies whose valuations have been hard hit need to prepare and be somewhat paranoid in an environment that is, unfortunately, a “shopper’s paradise” for activists.”
Taking inventory of key company information will help prepare you and your leadership team for a potentially challenging discussion. “The main buckets include balance sheet (e.g. too much cash, not enough leverage), management & board (e.g. lack of oversight, poor track record), and operational incompatibility (e.g. business lines with little synergies, divestiture can result in higher valuation for all parts),” explains Matt. “The purpose of this exercise is to identify what angle an activist could take when targeting you.”
There are also a number of practical steps companies need to take while they focus on protecting the future of their companies. Karen and Matt recommend taking the following actions:
- Compile and activist preparedness plan, which includes:
- assembling an activism response team (IRO, CEO, CFO, General Counsel, outside legal counsel, financial advisor, public relations firm, proxy solicitor, etc.)
- anticipating where the company’s vulnerabilities lie and how an activist would criticize the company, including its response to the COVID-19 pandemic and any “issues” your shareholders have commented on. As well as your plan to remedy those vulnerabilities or issues.
- Identifying any activists that could be potentially interested in targeting the company by examining what opportunities they’re actively seeking in your space
- Planning today for how the company and the board would respond to an activist targeting the company
- Utilize stock surveillance for early warning signs for activist presence in the stock and closely monitor who is moving in and out of the company’s shareholder base.
- Consider the need for a “poison pill” and other changes to the company’s bylaws to enhance structural protection.
- Proactively and thoughtfully message to the impact of COVID-19 on your company, addressing liquidity concerns, overall health and viability of the business, how it is handling employees, what the company is doing to give back to the community, the company’s long-terms strengths and potential opportunities, and ultimately, the company’s ability to rebound from this current crisis.
As we continue to search for solid ground in the post-pandemic world, IROs need to be prepared for any eventuality. If you’re interested in reading more about how to successfully navigate the impacts of COVID-19, check out The Value of Surveillance Insights During Times of Crisis.