Barbarians in the kitchen
A strategic approach to battling activist shareholders
During the 2008 economic downturn on Wall Street, and amidst the news of hedge funds furiously selling their positions to cover fund withdrawals, it would be easy to assume that these funds and the aggressive brand of shareholder activism pursued by them were on death’s door. We would not be so quick to dismiss them. There are enough drivers behind shareholder activism for its continued vibrancy in the current downturn, and that it may even emerge stronger, although changed. In this article, we will describe the typical behavior of shareholder activists and how CEOs and board members can deal with them. We will also describe the impact of the current economic crisis on activist hedge funds, and how activism is likely to evolve in response.
Activism in the current crisis
Activism is not going away, and may return in force. Financial institutions are being hit hard by the current financial crisis, and hedge funds are no exception. They are being depleted by investor withdrawals, which force share sales that in turn push down overall share prices. Compounding the problem, most hedge funds use leverage to amplify their returns (i.e., they buy on margin), so one dollar withdrawn from a fund requires more than a dollar of shares to be sold. Add to these forces the possible imposition of new capital adequacy and disclosure regulations in wake of the crisis, and you have a severely weakened hedge fund industry. There is no question that the activist funds will be hurt, and we expect a significant number of the smaller activist funds to close in the next twelve months as investors pull their funds from them and re-direct a portion to larger, more stable funds. The result will be fewer, larger funds pushing the activist agenda.
Ten things you should know about activist shareholders
- Activism punches above its weight
- Activists like healthy companies
- Activism is about pressure
- Activist tactics are getting more sophisticated
- Activists don't want control
- Activists hunt in packs
- Once activists go "active," the odds are stacked against you
- Many activists demand a change in strategy
- Activists have responsible hold periods
- Activists may create value, but rarely without severe disruption
Summary of stated goals of activist shareholder 2001- 2006
Source: Alon Brav, et al. The Long-term Effects of Hedge Fund Activism. Columbia University. April 1, 2015.
What can you do?
Get ahead of it: Chief executives and directors can and should do a number of things to avoid being the target of an activist.
- Have a growth story
- Think like the enemy
Gird the battle: If it appears hedge funds are accumulating positions in your stock, heighten your preparation.
- Know your activist
- Assess your board dynamic
- Be wary of procedural defenses
Engage and respond: Once the investor activates his campaign through a 13D, you will need to open the lines of communication fully and assess the activist’s case.
- Engage early
- Pick an independent point team
- Develop a proxy strategy
Following these guidelines consideration cannot guarantee that you will prevail in an activist battle. Sometimes the activist is right, after all, and your efforts may end up validating some or all of its claims. These guidelines can, however, reduce your chances of an attack in the first place, blunting it if necessary, and ultimately finding the answer for your company. If you prepare and execute well, you may be able to push the barbarians out of the kitchen and back to the gates.
“Barbarians in the Kitchen” was first published in the Perspectives series by Monitor Group in 2008.