By Jeremy Daniels – jeremy.daniels@ethicalboardroom.com
It goes without saying that hedge fund activism can no longer be viewed with dismissiveness – after growing levels of campaigns in the past 14 years, corporate boards, no matter how large and robust the organisation, would be foolish to regard them with anything less than seriousness.
A lot of companies continue to treat them with the contempt accorded to the overtly aggressive hostile takeovers that marked the 1980s, with strategies such as poison pills and staggered boards, but such an attitude betrays a fundamental lack of insight into current activist practices. Though their activities may be marred by a myopic, short-term approach, activists generally result in positive returns, and the growing history of success lends them a greater sense of power and confidence.
One of the biggest reasons for this is that activists are no longer seen as rough-handed corporate raiders; instead, their often forceful and vocal demands for changes in strategy and management have won them the support of shareholders, making it more important than ever to respond to them with the attention they deserve. And as an activist campaign can incur heavy costs upon management, executives must be able to assess the impact of a potential activist campaign so that they can respond proportionately.
Anticipating Hostility
In order to counter their approach, it is vital for boards first to recognise what may have attracted their attention in the first place – and then to establish appropriate and effective defence tactics. The biggest lure for an activist will often be, unsurprisingly, a history of underperformance, particularly in those organisations that have lagged behind their peers in the industry. Alongside this, repeated charges for restructuring also indicate weak spots that will catch the attention of an activist, and in certain cases, industry-specific targets will stand out, namely those such as industrial companies with undervalued assets in raw materials, or drug companies that fall behind their contemporaries in research or production.
Identifying limitations and recognising weak spots is all well and good. But in order to tackle the threat posed by activists, executives must also be able to anticipate and gauge the potential hostility of a campaign against them, and calculate a method of approach. While many activist campaigns start off as a neutral and collaborative opportunity, their underlying motives are often far more hostile – and result in a significant public threat or battle by the end of the campaign.
To avoid this, a robust response team needs to be in place to respond to an activist approach. Having the support of a diverse and well-placed strategic team, including investor relation experts, support analysts and wider counsel will prevent management from becoming blindsided by a lack of foresight, and instead be able to assess the potential risks and benefits of a proposal, suggesting a suitable compromise that can neutralise a threat.
Any considered response will require a good understanding of both the activist faced, and their suggested proposal. Finding out who controls an activist, their primary investors and their campaign history is all essential information. Whether or not a campaign is likely to turn hostile often depends upon the activist’s objectives, and analysing their past campaigns can help to clarify this.
“While many activist campaigns start off as a neutral and collaborative opportunity, their underlying motives are often far more hostile”
Understanding Motive
Those seeing changes in governance, corporate structure or bylaws will veer towards a hostile approach, no matter how collaborative their initial proposal may appear. By contrast, those activists seeking strategic developments are less likely to be as aggressive. They may approach with more subtle measures, such as individual discussions with executives or private letters, while their more volatile counterparts will often head straight to confrontation – through open statements or the public threat of a fight.
Careful analysis of both activists and their proposals must then be followed swiftly with an engaging response. Despite the temptation to fall into confrontational rhetoric, it is far more beneficial to use constructive and well-planned dialogue that is aimed at achieving real mutual engagement. By acknowledging and engaging with activists respectfully, practically and promptly, executives may be able to more successfully retain control, prevent disruption and ultimately preserve control over management.
Carl Icahn, one of the most vocal of current activists, demonstrated succinctly how the lack of proper engagement and strategy development can impact a board – forcing the recent agreement by eBay’s chief executive, John Donahue, to split eBay and PayPal in half, after having been described as “completely asleep” during his nine-month campaign against them.
The involvement of shareholders is another aspect to consider. Shareholders’ own suspicions about the efficacy of the existing management lend activists greater sympathy, and present another potential weakness that can easily be exploited. To counter this, managing investor and shareholder relations is absolutely essential. They should be engaged in frank and candid dialogue with management, highlighting concerns to executives, and in turn, relaying transparency and objectivity in the responses and explanations given back to them.
By maintaining close and regular engagement, monitoring and addressing concerns as they arise, executives can ward off attempts from activists to attach themselves surreptitiously, and drive pressure for management or policy changes.
It is unquestionable that hedge fund activists are gaining in strength, power and self-assurance. Companies are not protected merely by their size or history of past successes – any underlying hint of weakness will be rapidly sought out and targeted. And activists themselves come in all shapes and inclinations – there is no uniform threat that can be neutralised with a cookie-cutter approach.
Despite that, it is foolish for executives to simply hope and pray that they can simply lay low and avoid attracting attention – such an attitude will inevitably render them impotent in the face of an activist campaign. Instead, by demonstrating foresight – recognising their own weaknesses with honesty, establishing a robust response team equipped to tackle activists by determining their goals and attack-strategy, and working on improving shareholder relations, they greatly improve their chances of a successful counter-measure.
