The COVID pandemic has driven unprecedented market disruptions, and in the midst of this volatility, activist investors may be looking for opportunities. In fact, activists have become much more sophisticated in the past year even prior to the pandemic. Last year alone, there were 143 unique hedge funds engaging in activism, and about 20% of them doing so for the first time. Since many companies may have new vulnerabilities, IROs need to be prepared for the new rules of the activist shareholder landscape since many of the traditional approaches to combating activism have changed or are not available. Read on to find out what you need to know.
How the market has changed
To understand the key differences in the activist shareholder landscape between 2010 and 2020, you need to consider the number of hedge funds newly willing to engage in activist behavior and the strength of resources that they have available. In 2020, Jim Rossman, Managing Director, Head of Shareholder Advisory at Lazard, notes that there have been 100 activist attacks so far that 73 unique hedge funds have engaged in – 23 of which first being timers. Even in the face of the pandemic, it’s not slowing down. He acknowledges that there was a dip in the number, which usually is about 200 a year globally, as market caps over 500 million run about 15 or 20 a month. In April 2020, we dipped down to less than 10 campaigns, however, by June we rose back up to 17 campaigns. Interestingly enough, he adds that most of this activity is happening outside of the United States. For example, Japan is having a record year and Europe is also way up compared to the United States, who is actually down about 25-30% in terms of the number of campaigns. The campaigns that are happening though, are in small and mid-cap companies – not large-cap companies.
From 2018 to the beginning of 2020 mergers and acquisitions (M&A) was one of the top activist attack vectors. However, since March 2020, M&A has fallen way off and gone from 54% to roughly 30% in terms of its use as an attack vector. What has replaced it is operational enhancements and improvements, as well as assessing the quality of boards and management teams. There is broader market acceptance of vocal shareholder behavior, whether you call it constructivism or activism, that has moved into the mainstream and now is something boards and management teams need to come to terms with.
Company Pulse Check: Know Where You Stand
The pandemic has created an entirely new normal, and in its wake, you need to assess your company’s potential weaknesses for activist shareholders could latch on to. With the current climate, there are two areas that activist shareholders will be looking for: operational improvements and board and management. When you layer in COVID, the new attack vectors are going to dial in on things such as how you’ve pivoted in light of new circumstances and your company’s responses and actions to proactively communicate. To that end, it’s all the more important to be prepared internally for very specific conversations about your company, your industry, and your sector. Begin to address with your team how to speak on how you’re navigating the pandemic in general, and also the opportunity for activists to get traction with traditional investors.
Know Your Shareholders
A recent IR magazine survey found that roughly 64% of institutional investors globally are open to talking to an activist investor about a company for misuse. Depending on your situation, you can imagine how quickly there could be a majority of outstanding shares that are at least open to having a conversation with activists. With this in mind, it is important to prepare your company by taking the steps to develop a solid understanding of your shareholder composition. Not just from an investment perspective either. Work across silos and take a comprehensive look at your shareholders by working with your corporate secretaries or legal group members, doing the governance engagement, and being involved so you become very familiar with how your institution votes. There are many things you can do to ensure you’re in touch with your shareholders well in advance. You don’t want to be nurturing those relationships only after you get a call or letter from an activist investor.
Additionally, getting to know you shareholders individually will be critical, as the next phase of activism will no longer be about the ‘wolf pack’ mentality. Rather, it’ll be about which shareholders are with you, or not.
Review Your Data – Historical and Present Day
The good news is that, as IROs, there’s a bevy of public data to help you assess your level of vulnerability. Despite the ensuing volatility caused by the pandemic, aggregating and reviewing past data can help to identify any anomalies or trends, such as the types of owners. For example, you may have seen certain hedge funds enter in 2009, so it wouldn’t be surprising if they did it again. In addition to reviewing your historical data, it’s important to be vigilant about monitoring your stock trading as well as your options trading and look for unusual trades. Also, examine who is downloading data from your IR page and if there are abnormalities, such as web activity from lawyers who typically represent activists and proxy contests. There’s a lot of data you can pull, so pay attention as these can all be early warning signs.
Leverage New Technology
A recent poll found that 41% of IROs globally expect their non-IR responsibilities to climb over the coming months. By utilizing market intelligence and stock surveillance technologies, you can quickly identify early warning signs for activist presence in the stock, as well as closely monitor who is moving in and out of the company’s shareholder base. As mentioned in the points above, paying attention to who is accessing your web content, which PMs and analysts are on your calls, as well as specifically identifying if this traffic is from activist shareholders are all important practices to ensure you’re prepared for any activist shareholder activity. Aligning with the right tool can provide a tremendous amount of insight for you to leverage and reduce your manual efforts as your workload continues to increase.
To learn more about how to effectively and proactively identify an activist shareholder, download our infographic outlining the essential tactics you need to know, here.