M&A, Valuations and Activism: Board Lessons From 2008

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The causes are different, but lessons in the context of M&A and activism abound from the 2008 market collapse and the challenging environment that followed.

During the second week of March, company management and boards of directors were confronted with a tumultuous decline in stock prices reminiscent of the 2008 Great Recession, albeit triggered by very different circumstances.

Although the causes are different, there are lessons and experiences in the context of M&A and activism from the days and months that followed the 2008 market collapse that bear noting in today’s difficult environment:

• Most businesses already know that stock prices are likely not reflective of most measures of a company’s intrinsic value. The rapid sell-off in shares across all sectors, even those that ought see higher revenues, suggests that share prices are likely more reflective of the societal and market panic than the long-term value of any shares.

• In an environment in which everyone is uncertain about asset values, it is important to re-anchor the board to a company’s intrinsic value. Reminding the board that the company’s value is not reflective simply of market price trading — a important paradigm shift after this long bull market run — is the foundation for addressing the concerns that we address below.

— This re-anchoring may require updating or sensitizing current one-year plans and longer term forecasts to demonstrate that the commercial implications of the COVID-19 virus and attendant consequences — while very challenging in the near-term — are not likely to take the intrinsic value of the company down to current market lows.

— Reminding the board of a company’s value may also require working with bankers to prepare traditional valuation analyses based on those forecasts or sensitivities, and having the company or a company’s bankers present the results to the board to establish new valuation perspectives for directors and help anchor them to intrinsic long-term value rather than fleeting share price•

• Companies and their counsel are not the only players who understand that a company’s prospects are much stronger than current share prices reflect, even as adjusted for COVID-19 impacts. If the 2009-2010 period is an accurate barometer, private equity will identify the opportunities to acquire companies at attractive values, and activists will seek to take positions at attractive prices as the basis for future activism — this is already happening to some degree this week.  Further, the best capitalized companies in each sector may seek to consolidate at attractive prices.

There are a variety of steps that companies feeling vulnerable to these risks can consider taking:

— Undertake the forecasting and valuation exercise noted above. The first defense against opportunistic takeovers or short-term activist platforms is a board’s own confidence in the intrinsic value of the company.

— For sectors particularly challenged on a macro basis — such as airlines, hotels, entertainment, leisure activities, and energy companies — consider implementing a two-tier shareholder rights plan (so-called “ poison pill”) now. Our experience following the Great Recession was that institutional investors were sympathetic to the need to protect against low-ball bids and similar threats in a disrupted market environment, particularly if the rights plan was short in duration and the board committed to review it each year in light of changes in the circumstances which had justified its original adoption. Some companies are also taking such steps already this week. Companies carrying or expecting to build substantial net operating losses (NOLs) should also consider adopting rights plans customized to protect the NOLs as an important corporate asset.

Management and directors alike should remember that neither Delaware law, nor the corporation law of any other state, requires a board to accept, or for that matter even negotiate, a proposal that, while a premium to current market price, does not reflect intrinsic value. Similarly, activist pressure to take steps that may superficially appear attractive in current circumstances, but which do not make sense in the long term, can be rejected. In each case, only appropriate deliberation and analysis by the board is required.

• Keep lines of communications amongst the board and management wide open. Both the crises itself and limitations on travel and the like make it harder to stay in touch, but regular updates to the board by phone, video, or email are critical to maintaining a shared sense of value and purpose. Similarly — after the panicked calls are addressed — outreach to investors on longer term prospects and value will be appropriate when the roiled waters calm a bit.

Looking back to 2008, the executive and board leadership that did best for their shareholders focused on taking the necessary steps — regardless of then-current popularity with lenders, investors or otherwise — to preserve their key managers and employees, to maintain liquidity and to preserve and position the company for recapturing value as the crisis receded, including doing what they needed to in order to remain independent. Simply put, the principled and nimble boards and CEOs did best, often in the face of anxious investors clamoring for more short term fixes or exits.

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