By Ted Howard
Activists are getting bolder but companies are also getting smarter.
The latest premise surrounding hacking in corporate America (or corporate anywhere) is that it is not a matter of if you’ll get hacked, but a matter of when. While not of the same magnitude, corporate activism is growing; to the point that for many companies it’s getting close to “not if but when” in terms of becoming an activist target.
Companies have over the years done what they can to prepare for a possible activist campaign. The results aren’t necessarily a bad thing. There is nothing worse than a bloated balance sheet or excess capital sloshing around yielding nothing or not working hard. This has led to more cash management discipline and tighter capital structures. However, this doesn’t mean the activist attacks just stop.
“There’s no corporate structure these days that is perfectly immune to activism,” says Lawrence Elbaum, Counsel, Commercial & Business Litigation at the law firm Vinson & Elkins. “If an activist finds a thesis, they’re going to find a way to champion that thesis by leveraging the company’s shareholder base and defensive structure. They’ll find a way to make noise.”
That was evident in the first half of 2017 when some of the most prominent activists —i.e., Elliott, Greenlight, Trian and a host of others—elevated their campaigns to new levels, raising capital and going after the bluest of blue chip targets. Perhaps one of the more prominent fights, Proctor & Gamble vs. Trian’s Nelson Peltzis, is still raging despite claims of victory on each side. Greenlight went after General Motors for “a review on business strategy, capital allocation and financial policy,” according to Thomson Reuters Eikon Corporate Governance Overview, and also suggested the company explore “alternatives available to enhance or maximize shareholder value.” Meanwhile, Elliott partnered with BlueScape Energy Partners to “enhance or maximize shareholder value and also to evaluate the nomination of one or more individuals for election as directors,” according to Eikon CGO research.
According to Eikon CGO, there have been 353 activist campaigns globally year-to-date, mostly in the US. Generally speaking, activist campaigns average about 400 or so a year. That means with about 4,000 publicly listed companies, approximately 10% of corporate America (and nowadays beyond) is at risk of an activist campaign.
And activist demands run anywhere from board positions to enhancing shareholder value. In some cases they go for the neck by getting rid of the CEO or agitating for management change. This has happened in several instances so far in 2017, including AIG, Arconic, CSX, GE, Pandora, and Perrigo. But in one prominent win for a company under siege, this didn’t happen. According to Eikon CGO, activist RBR Strategic Partners in March suggested asset manager GAM Holding chairman consider bringing in a new chief executive. The activist also wanted GAM to cut 353 back-office jobs to help lower costs by $100.4mn annually, and proposed a new chairwoman and board member. GAM shareholders rejected all RBR’s proposals.
GAM was unavailable for comment on how it waged its defense, but it likely did what V&E’s Mr. Elbaum says all companies should do: continually engage with their shareholders. “A lot of times what we see in a proxy fight is that some companies are really just engaging with their biggest shareholders for the first time,” Mr. Elbaum notes. “That’s not a good thing. You want to have an open dialogue with your shareholders at all times.” In this way, “you find out what your shareholders are thinking about you in real-time and you don’t get ambushed in the middle of a proxy fight.”
“Be sure to develop a coherent message for investors,” says one member of the NeuGroup’s Treasurers’ Group of Mega-Caps (tMega), adding that it’s also wise to “go after a few significant ones to solidify the message with a portion of the investor base.” This tMega member was speaking in the context of changes to US corporate tax rates and in particular, the possible repatriation of billions in US corporate cash to the US. “If repatriation happens, activists will not delay in gunning for the return of cash to shareholders,” this member says. “They may, however, give you a shorter or longer window depending on how much trust they have in management. If they trust management, you’ll get a longer window; if not, you’ll get a shorter one.”
Another suggestion from Mr. Elbaum is to go through a mock activist test and research current trends in shareholder activism and the activism landscape. “They should think carefully about what they would do in different hypothetical situations … it’s the best way to be prepared and not be caught flat-footed.”
Companies can also prepare by having an outside entity prepare an activist prep sheet or white paper highlighting the company’s strengths and weaknesses. This helps come up with scenarios on how the company would respond if one or two weaknesses were to be exploited.
“Advanced preparation is something on the minds of corporate America,” Mr. Elbaum says. It “can help defuse the situation before it becomes live.”
Invisible Shareholders
One major blindspot for companies is the growing popularity of index funds. Flows out of actively-managed strategies and into index funds have given activists “outsized influence in an environment of increasing shareholder concentration,” according to a study by Jim Rossman, Managing Director and Head of Corporate Preparedness at Lazard. “If you are the CEO of a very large or midsize company in the United States, you’ll find that 30 to 40 percent of your stock is being managed by no one you can talk to,” Mr. Rossman says in an interview with Bloomberg.