Handling activist investors

22 July BRR image

The growth of activist investors in the US has prompted management consulting firm Bain & Company to conduct a study examining more than 400 activist investments which has  found the target companies are becoming larger and the industry segments more diverse.

The study, Agitators and reformers: How to respond to activist investors, found 70 per cent of activist engagements fall into five categories: consumer goods, financial services, technology, industrials and materials.

Surprisingly, it also found that the companies targeted were not simply the expected “strugglers” but actually high-performing businesses too. This indicates that even the best companies are not immune to this new phenomenon and all need to be prepared.

The study states that a target company cannot afford to ignore an activist but nor do they need to accept or reject their ideas. Instead they need to evaluate the proposal quickly and decide how to react. The first step is to understand the common patterns of activist investors.

Bain’s findings contend that activist investors fall into two categories – agitators and reformers. The agitators are in the minority and are single-demand focused; usually on corporate governance changes like a new chief executive officer and/or directors. This group was shown to produce minimal differential return compared to industry indexes.

The reformers however, are now the largest group of activist investors and characteristically have a well-defined strategic program for reshaping the company they are pursuing. The reformers’ proposals are often carefully researched and include a high level of detail.

To be ready for an activist’s approach, Bain recommends having an emergency response plan in place that has been pressure-tested against activist patterns and objectives. The plan includes reviewing your company’s operational performance against peers, aligning executive compensation to company performance, regularly reviewing your business structures, testing the strength of your balance sheet and reviewing internal valuation against market valuation and having answers for any gaps.

A key element of the plan is effective investor relations - developing good relationships and effectively conveying your company strategy with major investors will be critical to defending your position.

Bain concludes that most companies don’t take activists seriously at first and typically respond defensively which doesn’t work. Therefore, having an understanding of activist investment characteristics, a robust plan in place and an ability to communicate quickly and effectively with key stakeholders allows the company to have the best chance of avoiding a dilemma.

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