Thursday, March 19, 2015

When Activist Investors Knocked on the Door

A few years ago, I was on the Board of Directors for a NYSE-listed public company when an activist investor appeared at our doorstep. These investors are individuals or groups that purchase large numbers of a public company's shares - or seek to obtain seats on the company's board - with the goal of bringing about major changes.

In our case, the investor bought 8% of the company and over several weeks increased his holdings to almost 20%. As the lead director for our company, it was my duty to understand this investor’s motivation and intention.

Thus began my education in the tactics of outside investors who fundamentally disagree with the strategies of incumbent management.
Today, there are scores of such investors who are persistently scanning the performance records of public companies for opportunities to force change of strategy, direction and/or execution.  Here is a good summary of some leading activists.

These investors commonly look for one or more symptoms:
  • Low P/E multiples vs. peers, indicating a valuation disadvantage
  • Trend of missed earnings guidance
  • Clubby board composition
  • Companies going through a major change in leadership and/or market conditions
  • High levels of cash/assets that can be better monetized
  • Persistently under-performing divisions or operations; candidates for divestiture
  • History of accounting irregularities/governance issues
  • Declining investor sentiment

The common thread here is the indictment of current management strategies and practices.
In our case, the activist implemented a proxy fight and secured for himself both the CEO seat and half of the Board positions. At this point, the shareholders voted to give the activist the reigns to drive the company forward.

As activism has become increasingly common across industries, companies have become adept at interacting with these investors in ways intended to avoid loss of control.  Boards of Directors tend to communicate more readily with these investors, consider their questions and ideas, and gauge the degree of shareholder sentiment that these investors represent.
Sometimes the intervention of an activist is just the sort of forcing function that a company’s leadership needs to appreciate the seriousness of shareholder dissent. Too often, the motives of the activist are described as merely a selfish desire for seats on the Board. 

I am hearing this topic more and more in the hallways of the companies I serve. Many perceive the potential for an activist as a call to arms. Many leaders have the motivation to undertake value-enhancing steps themselves, rather than waiting for an activist to seize control of the agenda. 
Progressive CEOs are encouraging their leadership teams to challenge the comfortable and conventional doctrines of their business by asking, not entirely rhetorically, “What would an activist do to drive improved shareholder value?” Some of the more common avenues of inquiry that I experience include:

     Do we have a strategy to win in an increasingly digital market?

     Are our operating units best positioned to perform as part of the enterprise, or as stand-alone companies?

     Are our business support processes sufficiently agile to flex with an increasing pace of change in our markets?

     Is our talent contemporary with the issues and opportunities of our markets?

     Are we engaging with our customers in the ways, and through the channels, that they find optimal?

     Is our structure fit-for-purpose in a world of increasingly nimble competitors?

     Are we investing in the things that make a competitive difference, and buying/subscribing to the services that are best leveraged?
I am finding that such questions increasingly frame the agenda for business units, corporate support functions, and shared services leaders at all levels of many organizations.

Complacency fuels activism. Leaders can leverage some of the same energy by bringing an owner’s mindset to all aspects of their organization’s strategy.

Peter Allen has many years of operating experience as a top executive of rapidly-growing multi-billion dollar companies and in assessing sales and marketing effectiveness. He is now a Boston-based Managing Director at Alvarez & Marsal.

 Image: cdx_cdx ✔/Flickr

1 comment:

  1. Activist investors are great to have on your side because they are really passionate about what the do, but it's hard to be on the other side of one