Activist investors have always been top of mind for IROs and management teams. Last year many companies got a free pass as COVID-19 disrupted businesses and created volatility in the markets. As a result of the pandemic, many activists scaled back their campaigns to let management teams navigate the economic shutdowns and focus on employee/customer health and safety.
As we turn the corner to 2021 and look to reopen the economy, it seems like activist investors are coming back in full force and pushing for changes at several companies. Well known firms like Exxon Mobil (XOM), Kohl’s Corp. (KSS), Intel (INTC), Bausch Health (BHC), Elanco Animal Health (ELAN), and Box (BOX) have all been targets in recent months by some of the largest activist investors, including Starboard Value, Ancora Advisors, Legion Partners, Inclusive Capital Partners, and others. In many cases, the news of activist involvement has sparked positive reactions from investors as some stocks have rallied on prospects of potential change.
We took a deeper dive into some of these activists and their activity in recent months, while also providing a broader perspective on activism across the markets.
Starboard Value is one of the more notorious activist investors in the markets with well over a hundred campaigns in its history. Led by co-founder Jeffrey Smith, the firm has been making a lot of noise thus far already in 2021. The firm reported a 6.9% stake in Elanco Animal Health in early March based on recent regulatory filings. Starboard also nominated four of its own potential candidates for the company’s board of directors.
Shares of Elanco have been under pressure in the last few years since it was spun off from Eli Lilly (LLY) back in 2018. The stock’s underperformance had already attracted activist attention from Sachem Head Capital Management, which held a 5.9% position as of the end of 2020. In response, the animal healthcare company has already taken steps this year to cut costs and increase its 2021 revenue and earnings guidance.
Starboard made headlines once again this week with its previously disclosed position in Box (BOX). The U.S. cloud services company is reportedly exploring a possible sale to other companies or private equity firms amid pressure from Starboard. Coming into the year Starboard held a roughly 11M share position (6.9%) but upped it to 12.55M (7.9%) as it prepares to launch a board challenge unless the company takes steps to increase shareholder value. Holders reacted positively to the news as shares of BOX finished 4.8% higher on March 22nd.
Starboard holds a relatively concentrated portfolio of ~20 stocks and notably sized up its positions in some of its top holdings last quarter, including Corteva (CTVA), NortonLifeLock (NLOK), and ACI Worldwide (ACIW). The firm also initiated a 9M (2.2%) share position in ON Semiconductor (ON) in the fourth quarter last year.
Activist investors have been known to herd together and combine capital to push a mutual agenda on certain companies. A similar situation is ongoing right now with Kohl’s Corp., which has been battling a group of activists including Macellum Advisors, Ancora Holdings, Legion Partners and 4010 Capital. In February the investors announced a 9.5% stake in the company and intentions to nominate nine members with more retail experience to its twelve person board.
This same group of investors had previously worked together to successfully add five board members at Bed Bath & Beyond (BBBY). Kohl’s has been somewhat successful thus far in rejecting the takeover attempt as the activists announced in mid-March they are scaling back their demands and now only plan to nominate five directors to the board.
Kohls has been facing competitive headwinds for several years as they have been losing market share to companies like Amazon, Target, and Walmart. The losses began to accelerate last year as customers stayed home during the pandemic. Despite the headwinds, the stock has managed to outperform in the last six months and has more than doubled from the low $20s in early November to $50 in February.
The stock spiked over 6% on the day of the original announcement in February and has continued to push higher, breaking above $60 last week. Despite the recent move in the stock price, the activists still feel the stock could double from here through cost cutting, slashing inventory levels, and potentially selling some of its non-core real estate assets.
On March 1st, shares of Exxon Mobil (XOM) rallied just under 4% on news that it was making two board seat changes. These moves come after months of pressure from shareholders to make changes and re-energize the stock, which has suffered over the years.
In December, a new activist firm called Engine No. 1 announced plans to seek four seats on Exxon’s board. The group, which includes founders from other big activist firms like Partner Fund Management and Jana Partners, has been able to garner support from other shareholders like D.E. Shaw and California State Teachers’ Retirement System (CalSTRS).
The group has outlined new strategies to improve Exxon’s financial position and ways to boost the stock price. Furthermore, there have been calls from shareholders for the company to invest more in clean energy and increase disclosures about its carbon footprint and emissions.
As a result, one of the new board members being added includes well-known activist investor Jeff Ubben. Jeff Ubben spent twenty years at ValueAct and was involved in numerous campaigns before stepping away and founding Inclusive Capital Partners last year. Inclusive Capital currently holds a relatively small position in Exxon but is expected to become a significant shareholder over time.
The Jeff Ubben announcement was welcomed by investors as he is widely known as being a big proponent of ESG and socially responsible investing. Mr. Ubben has said he believes major oil companies should have excess cash to spend on clean energy by cutting costs, spending, and dividends.
In addition, Exxon announced last month a new business unit that it said will focus exclusively on technologies to lower carbon emissions. The new business will invest $3 billion through 2025 in lower-emission energy technologies, primarily on carbon capture and storage projects.
As a result of all these changes, Exxon’s stock price has almost doubled from the low $30s in October to $55 this week.
We recently saw an interesting move from Artisan Partners, generally a solid long-only shareholder to have in your stock. Artisan Partners is a Milwaukee-based investment manager with approximately $128B in equity assets under management and typically takes sizable positions in the companies in which they choose to invest.
Artisan recently took an activist stance in Danone, a French food company, by joining Bluebell Capital, a London-based hedge fund with a reputation for driving organizational change, in calling for better governance, including a need to address its Board structure and leadership.
In a publicly disclosed letter to management, Artisan criticized Danone’s performance versus competitors like Nestlé and Unilever, calling for boardroom changes, including the recommendation that Emmanuel Faber, who has been Danone’s CEO and Board Chairman, focus solely on his CEO responsibilities, and carve out the role of Chairman to someone else. On Monday as a result of this pressure, Faber left the Company. Artisan has only engaged in five other activist campaigns in the past, including sending public letters to management in three of those cases.
Activism Across the Markets
During 2021, we’ve seen 71 “high impact” campaigns across the US. This figure compares to 335 that took place over 2020. When analyzing on a global basis, we’ve seen 100 “high impact” campaigns which compared to 593 that occurred during 2020.
From a US industry perspective in 2021, activists have been targeting companies most heavily in the financials, energy minerals, health technology, electronic technology, consumer services.
When looking at proxy fights, we saw 98 over the course of 2020 and we have already seen 59 thus far in 2021. On a global basis, we observed 257 proxy fights in 2020 which compares to 95 thus far in 2021.
It is also worth noting that Olshan Frome Wolosky LLP and Schulte Roth & Zable LLP advised activists on the highest number of high-impact campaigns during 2020 (77 and 24, respectively). During 2021, Olshan Frome Wolosky is leading the way, having advised on 15 high-impact campaigns while Schulte Roth & Zable remains in second, having advised on three campaigns YTD.
If you see these names pop up on your website or in any engagement, please be cautious.
How IROs Can Navigate Activist Investors
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.
Shareholder activism is in uncharted waters and the ultimate impact of COVID-19 on shareholder activism is largely uncertain. Companies should prepare themselves for the possibility that they will be targeted by one or more activist investors.
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 hard look in the mirror, put yourself in their shoes, and be prepared to answer the difficult questions.
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 an 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 overall health and viability of the business, addressing liquidity concerns, what the company is doing to give back to the community, and the company’s long-term strengths and potential opportunities.