BP, Mattel, Samsung, Norfolk Southern, Disney, Etsy — the news is full of moves by activist investors to press for change at public companies where they have a stake. That’s because activity by these investors picked up substantially in 2023. Globally, 252 such campaigns launched, up 7% over the prior year, according to investment banking firm Lazard.
While campaigns launched in the United States slowed slightly, Europe and Asia picked up the slack. European companies saw a record 69 campaigns and APAC 44. And activists are coming in more shapes and sizes — more than 180 different activists and the greatest number of "first timers" initiated campaigns, according to Lazard.
“The number of activist engagements returned to peak levels, globally,” said David Garfield, global head of industries at AlixPartners. “Executives have been seeing more cases, in more places.” They also recognize that “it has become a well-established part of the investing landscape,” he told CFO.
For CFOs, CEOs, and boards of directors, the implication is that “future-proofing” the company against activists is essential. “That requires taking an active approach to reviewing and improving performance so that the actions required by activists aren’t necessary,” Garfield said. In other words, “institutionalizing the kind of governance, capital allocation, portfolio management, and profitability that lead to top-tier shareholder value.”
Activists look for underperforming companies. An activist alert by law firm Fredrikson & Byron in late 2023 listed four financial metrics that could make a company a likely target for activists. Relative to sector medians, target companies often have (1) slower trailing sales growth; (2) a lower trailing enterprise value-to-sales multiple; (3) a weaker trailing net margin; and (4) trailing two-year underperformance.
Nofinancial vulnerabilities also count, according to Fredrikson & Byron. “Activists are much more likely to win if they can also leverage nonfinancial issues important to institutional investors,” according to the firm. Those issues include “shortcomings in corporate governance structures, a weak correlation between executive pay and performance, or lack of progress on environmental and social initiatives compared to peers.”
A third kind of vulnerability is “signals of waning shareholder support,” according to Fredrikson & Byron — “mediocre director election results, low say-on-pay results, or high support for shareholder proposals and perceived inadequate company responses over multiple years.”
“If approached, companies need to understand what kind of activist firm they're dealing with and what options they may have — then they can respond in the right way."
Global head of industries, AlixPartners
Be Your Own Activist
The other aspect the C-suite and board members need to recognize is that activist investors have expanded their range of investment strategies and approaches. Some firms have established private equity lines of business that enable them to take companies private, said Garfield.
Indeed, a Vinson & Elkins paper on activism this year said activists will call more frequently for the outright sale of companies. “Armed with extensive financial analysis and a deep understanding of the industries they target, activists are increasingly likely to make the case that breaking up or selling off certain divisions or subsidiaries would create more value for shareholders.”
Regardless of the investors’ motives, “if approached, companies need to understand what kind of activist firm they're dealing with and what options they may have — then they can respond in the right way,” Garfield said.
In such a situation, the CFO needs to be the point person “for translating potential improvements in the business into financial targets and timing,” said Garfield. He or she also “needs to be able to lead constructive, fact-based discussions that support good decision-making.”
But if a CFO waits until an activist engages to address a company’s vulnerabilities, it’s already too late.
Long before this moment arrives, a CFO “should help the CEO and board examine the company through an ‘activist’s lens,’” said Garfield. That means asking and answering questions like, “If I were an activist, how would I assess our company in terms of value creation? What improvements do we need to make? How quickly can we make them?”