The first quarter of 2022 saw 73 new activist investor campaigns launched, marking the busiest three-month period on record, according to data from Lazard. The US accounted for most of the campaigns, although Europe saw activity jump by 50 percent compared with the SAE quarter last year.
To discuss this uptick in activity and how companies can prepare for engagement with an activist investor, Q4’s VP and Head of Global Partnerships & Alliances, Mike Coffey, had the pleasure of joining a panel of experts for IR Magazine’s webinar, “Best Practices for Engaging with Activist Investors.” The panel consisted of IR Magazine’s Editor-in-Chief and the moderator of this webinar, James Beach; Georgeson’s Managing Director, Edward Green; Equinix’s Director of IR, Chip Newcom; and Lazard’s Co-Head of Capital Markets Advisory, Jim Rossman.
Among the topics discussed were the latest tactics employed by activist investors, the continued growth of ESG-focused activism, the ideal activist response plan, tips for successfully engaging with activist investors, and more.
Trending Activist Investor Tactics
It is safe to say there have been changes in the landscape of activism over the past few years, primarily due to the pandemic. These changes and the current environment differ throughout industries, but there are some common trends the panel has noticed. Some activist strategies and tactics to be aware of now are:
- Increased awareness with a willingness to try new strategies and take more risks. Whether that’s going after a company with a whole proxy fight, an exempt solicitation, a vote-no campaign or even a shareholder proposal to push for a sale of the company, an activist investor engage in a wide variety of tactics. You need to be ready for a full range of strategies.
- Attacks due to significant pivots.
Recently, activists have targeted companies primarily because of shifts in strategy with little to no explanation. Newcom suggests adopting transparency and giving clear reasons for any strategy changes. He explains that you can’t surprise the capital markets without creating an opening for activists.
- The evolution of hedge-fund trading tactics.
The willingness of activists to team up with other sources of capital, particularly private equity, must be noted. Some activists now purchase shares through a swap arrangement with a broker, and they’ll use derivatives and will move shares around.
The panel warns that no company is immune to activism, explaining that they’ve seen it in both the largest and smallest companies. But, there seem to be some more at-risk groups; for example, small and mid-cap companies continue to be the sweet spot for activists simply because so many hedge funds are capable of taking a meaningful position in them.
They indicate, as well, that there have also been more attacks this year on management and CEOs. These executives are in the spotlight and scrutinized in the press over the PE ratios, compensation, and bonuses, especially as the cost of living continues to skyrocket.
It’s best to prepare your team for when an activist comes into your stock rather than if.
The Emergence of a New Generation of Activist Investor & Post-Pandemic Engagement
As the capital market changes, so does the pool of activist investors. A new generation is emerging, and this generation often takes a different approach than the old guard. In fact, about 20% of activist investors are newcomers.
Mike Coffey explains that the way this new generation trades adds complexity for IROS. So, some of the tools we use to monitor activists have evolved as well, to not only react to their current tactics but anticipate their next move. He adds, “One of the big things that I would point to is the evolution of engagement analytics, [whereby we marry the digital footprints of activists with their trading activity.]” As a result of the pandemic shifting so much activity online, we now have the information to anticipate an activist taking a position, such as who is reading your press releases, who is registering for your earnings calls, investors days, and ESG days, etc. Lastly, he says that he believes engagement analytics must be a big part of your strategy to face this new generation of activists head-on. Rossman adds to Coffey’s point, explaining that while the right technology is a must-have, it’s also critical to have experience in interpreting the data.
Your Day-One Activist Investor Response Plan
While having the right analytics and technology is essential, having a day-one activist investor response plan that your team is well-versed in and aligned with is still critical. As Greene points out, an activist attack will most likely come at the worst time possible – whether in the middle of your earnings or an ESG meeting. Once your surveillance team has detected a potential threat, your next step, after briefing the board and assigning the right teams to the proper tasks, is to learn everything you can about that activist. Ask yourself:
- How do they typically engage with the issuer?
- Who are the other hedge funds that typically tag along with that activist?
- What are their tactics?
Once you have done this, you can take that information back to your company and build your response team. This will include legal, proxy, advisors, etc. so that you’re prepared for when the CEO calls you or when the activist calls your CEO. A few pieces of your plan to consider ahead of time are:
- Who needs to be notified first across IR corporate communication, the executive team, and the board.
- Decide the next steps for communications, both internal and public.
- Decipher steps for potentially engaging the activists.
- Assign a team member to take over the day-to-day business management while working with the activist coming into the stock.
The Continued Growth of Single-Issue Activism
As more uniform ESG standards come to the United State and the SEC demands more information and transparency, Rossman explains that companies’ strategies for ESG and other critical issues will become visible and readily available; making the information more accessible to activists. And activists will use this information to detect your performance. He indicates that you will have to start accounting for single issues in your data, such as climate, labor, equity and pharmaceutical pricing and predicts that we will see more single-issue activists emerge in the future. The only way to combat this is to be prepared, be conscious about working in silos, and ensure transparency between your board members. Lastly, stay vigilant and ensure you have the right team members, plan, and engagement analytics in place.
Click here to watch the entire webinar and gain more insights from this excellent panel of speakers.