FUNDAMENTAL DRIVERS
What are the drivers of activist campaigns? Activists are, first and foremost, investors. They seek great returns and they propose changes that they believe will drive better future performance than the market expects. In this way, the driver of activist activity is really perceived as suboptimal plans, not suboptimal past performance. The tactical focus is often on strategy, operations, the balance sheet, business configuration, the board and M&A.
Activists are often extremely knowledgeable about the company, very invested in future outcomes, and equipped with analytical tools that can outstrip even a well-meaning board. Ultimately an activist must be able to answer the question: why hasn’t the board adopted the proposed changes? And so, activists necessarily focus on perceived deficiencies in board composition or on a claim that the board is “stale.”
Naturally, then, boards with longer average director tenure are significantly more vulnerable to campaigns. If there is a deficiency in strategy or business configuration and the Board is seen as “stale,” the activist can claim the staleness has led to the suboptimal choices.
“more fights in absolute numbers went to a final vote in 2016 than at any time since 2010.”
Activist campaigns are remarkably successful, in part because activists get to pick their targets. In well over half of the campaigns, significant changes are driven by the activist. CEO tenures are shorter and, according to some academics, stock performance is better,
once an activist appears.
A 2017 survey by FTI Consulting finds that settlements have become more prevalent and have come quicker than in the past. Nevertheless, more fights in absolute numbers went to a final vote in 2016 than at any time since 2010.
The increased number of companies facing activist campaigns has been driven by non-traditional activists. Mainstream, long-only institutional investors and first-time or “occasional” activists account for nearly all the increased volume in activism. Recent examples include campaigns by Neuberger Berman, T. Rowe Price, and PAR Capital Management, all three of which had been regarded as traditional investors that “vote with their feet” rather than vocally.
Activism is becoming a tactic deployed by all types of investors rather than a “strategy” that defines a fund. Along with its broader adoption, the practice of activism has professionalized, with a bevy of advisors that help both investors and companies to engage in these campaigns.
Given the willingness of more investors to use activist tactics, every public company may have “activists” in its shareholder base. The lurking activist may not have a familiar activist fund name: it may be your long tenured shareholder that wants to be heard. Some “activists” are hidden in plain sight.
