Corporate boards that have not proven they’ve provided significant shareholder value since 2018 may face significant efforts to oust their directors by activist investors in 2020. After corporations benefited from the Trump tax cuts of 2017, there are signs that stakeholders may be looking to hold boards accountable for failure to turn the tax windfall into growth that can extend into the next decade.
An example of this can be seen in Xerox’s recent hostile takeover attempt of HP. In this historic bull market, HP shares have managed to lose 8.1 percent during the period from January 26, 2018 to January 24, 2020. By contrast, the Dow Jones Industrial Average jumped 8.9 percent and the S&P 500 index was up 14.7 percent during the same period.
Xerox, whose shares grew 8.1 percent during the same period, looked to capitalize on the tech giant’s sluggishness by bidding $33.5 billion for HP in November. After several rejections of its offer, Xerox has appealed to HP shareholders to dump the entire HP board and accept a slate of 11 independent directors it intends to nominate to replace them.
HP initially argued that the takeover bid undervalues the company and is being driven by corporate raider Carl Icahn, who owns significant shares of both Xerox and HP and would benefit greatly from a merger. The company reportedly said the bid “disproportionately benefits” Icahn and is fraught with risk. Unfortunately for the HP board, after two years of poor performance, they’ve left themselves vulnerable to criticism and activist investor Icahn. Since Xerox has indicated that it is committed to the takeover attempt, the HP board must now convince shareholders that it is better to trust it to turn the company around instead of moving on with the merger and a new board.
It will be interesting to see how HP directors attack that challenge. It’s been reported that the board is considering another share buyback program, but it likely would have to be more lucrative than the merger offer and be teamed with a convincing future growth strategy that accounts for revenue losses in the rapidly diminishing printer market that it once dominated.
The dilemma for HP and any other company whose stock has not performed well since the tax cut windfall is, how does the board explain the lack of performance in an economy that many say is one of the best in history? And has the board effectively communicated a strategic plan for creating long-term growth and value into the next decade?
Because the stock markets have surged since 2009, there is plenty of money available for mergers, and experts have forecast that deal making should be quite active 2020. Therefore, if they haven’t already, boards should begin assessing whether or not they would make a good takeover target for another company. They should run potential scenarios regarding what would be done if a takeover attempt were launched against the company and determine what type of defense they can mount against a takeover attempt. Xerox is attempting a hostile takeover of a company three times its size, so any company can be in play.
Perhaps the most important consideration for boards of companies that have lagged since 2018 is whether or not a convincing argument can be made that a merger will create sustainable long-term value for the resulting company and its stakeholders. As always, shareholder engagement with investors that have been supportive in the past may provide insight that could help boards avoid being blindsided by a takeover bid. But if your stock has significantly lagged over the last two years, presume that an activist is examining your financials and may come to talk to your board soon.