When The Activists Get Active

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If your stock is running behind over the last 18 months and you haven’t gamed out what you’ll do when an activist comes calling, now is the time.

When I was a young business editor at The New York Times, I had a wonderful, wise mentor named Jack Lynch who liked to remind me of his favorite truism: “There’s no such thing as the stock market, Sunshine,” he’d say. “It’s a market of stocks.” (And yeah, he really called me Sunshine.)

As we head into the in the homestretch of the year, Jack’s words ring true for me, as always (he died a few years ago, sadly). Through mid-August, the overall S&P 500 was up more than 17 percent. But even amid this bull run, 364 of the index’s individual components were underperforming the overall index, and 188 of those stocks posted negative overall returns for the year thus far. Of those, 314 underperformed the fully doggish -0.39 YTD returns of Treasurys. 

Yikes. Is it any wonder that boards hear from activist investors so often? Yes, of course we can grouse about their sometimes brutal commentary, predatory tactics and so on. But you must admit that a world where you can park your money in a risk-free Treasury and outperform two-thirds of the stocks in the S&P isn’t exactly a moat against aggression. 

In a study released earlier this year, David Kostin and Jenny Ma at Goldman Sachs dug into 2,142 activist campaigns waged against Russell 3000 companies since 2006 and found four key metrics that predicted a company would become a target: slowing sales growth, lower trailing enterprise value to sales multiple, weaker trailing net margin and trailing two-year underperformance. 

Of the 733 campaigns since 2006 with sufficient data for all four metrics, they found 89 percent had at least one identified source of vulnerability, and 70 percent had at least two. At the time of their study this spring, the authors identified 113 companies among the Russell 3000 with market caps above $5 billion that they thought “may be susceptible” to an activist campaign.

So the good news is (I guess?) that if you’re underperforming, you’re far from alone. There just may not be enough sharks in the water to attack everyone at once.

What to Do

The best strategy in this environment, is, obviously, to perform better financially—at least better than the others in your peer group (and deliver higher returns than a government bond). Despite the pull of stakeholder capitalism’s myriad demands, it’s incredibly important not to lose sight of that, though it does, unfortunately, happen in our current social hothouse. 

There are other tactics to remember as well, all of which involve taking control of what you can control. My colleague Matthew Scott recently put out a refresher sheet of tactics that’s worth revisiting, especially if you’re behind. They include:

• Engage shareholders to discuss reasons for lagging performance and possible
solutions as early as possible. While this seems obvious, some boards may believe they should be given time to show results—and they may not be given as much time to show results as they have in the past.

• Prepare alternate strategies in case the primary strategy fails. While the idea of anticipating current plans failing may be unappealing to some directors, Scott points out that some shareholders might view the board having actionable alternative plans that could help the company pivot from a failed strategy as a plus.

• Get ready to rumble.  Activists often attack a corporate board as lacking specific skills and experience that they believe are needed to improve company performance or deal with specific crisis situations. “Those attacks,” Scott writes, “cannot go unchallenged.” 

Most important: Make sure you have a crisis management strategy. The above numbers are not exactly winning-the-lottery small. If your stock is running behind over the last 18 months and you haven’t gamed out what you’ll do when an activist comes calling, now is the time. 

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