Making the Right Move: Preparing for an Evolving Activism Landscape

Citi GPS Opinion Article

9 February 2017 – Activist hedge funds remain an important force in the boardroom, despite a decline in campaign activity this past year and underperformance relative to the broader stock market since 2013. Over 60 campaigns were initiated against S&P 1500 companies in 2016, activists’ assets under management are still nearly double their level of four years ago, and the news of an activist campaign typically generates an appreciation in the target’s stock price.

Shareholder activism continues to evolve, with activists focusing more attention on companies with lagging stock returns, smaller companies, companies in the financial sector, and companies in Asia. Shareholder activism has also gained more mainstream support, evidenced by increased backing from traditional institutional asset managers and fewer openly confrontational campaigns.

Activists enjoy continued success in gaining board representation, particularly at the very largest targets. More board seats are being awarded to activists in early settlements that avoid a proxy fight, and targets’ stock returns suggest this may sometimes be a desirable outcome for shareholders. There does, however, seem to be a limit to how early a target should settle: “pre-packaged” settlements – those announced concurrently with the campaign itself – have exhibited lower stock returns than other types of settlements.

More than 40 percent of activist campaigns publicly demand a specific strategic action, such as selling assets, spinning off a division, or seeking a buyer for the company. Activist investors have been remarkably effective in accomplishing such changes: an activist target that was asked to seek a buyer was four times more likely to be acquired than the average company. Even those targets that were not asked were twice as likely to be acquired.

Nearly half of all campaigns make no public demand for a specific strategic or financial action. This kind of campaign, which has become more frequent in recent years, tends to focus on operating efficiency, capital allocation, business strategy, and other changes that often require long-term engagement. Perhaps because of their long-term focus, such campaigns were also more likely to result in a board seat for the activist.

Our findings offer a number of implications for corporates: do not write off activism as a fading force, assess your vulnerabilities through an activist’s eyes, listen to your shareholders, build a great board, articulate your strategy, consider the possibility of activist intervention when planning M&A transactions, and engage early if approached by an activist.

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