Proxy fights have cost US companies an average $4.8 million so far this year according to the latest issue of Activist Insight, with management consistently outspending activists for anything above micro-cap stocks in what activist investors say is a classic case of misaligned incentives, but partially just reflects the two sides different obligations

Management spends more on proxy fights than activists

As you would expect, the cost of a proxy fight goes up for both sides as the market cap of the target company increases, but the jump small- to mid-cap companies is still pretty striking, increasing almost five-fold according to quarterly and annual reports. Activist Insight points out that large-cap proxy fights are still pretty rare so the sample size is small and the average could easily shift if large-cap fights become more common.

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The costs to activists also go up based on the size of the target company, but not nearly as quickly. Going on proxy solicitation costs, which both sides have to disclose, activist investors are often outspent by 2:1 or more.

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“Defending irresponsibility requires a lot of effort,” says Shareholder Forum chairman Gary Lutin, “but it will always be worth spending whatever amount of other peoples’ money is required.”

That’s a cynical way to view the situation, but it’s not entirely inaccurate either. Activist funds have a strong incentive to keep costs under control so that the investment works out, while board members playing defense in a proxy fight have more binary outcome that doesn’t give them much reason to hold back. At the same time, management has an obligation to give every shareholder the opportunity to vote, and reaching out to a diverse group of institutional and retail investors is labor intensive and expensive. Activists only have to contact the handful of institutional investors they think are likely to back them in the coming vote. Experienced activists will also have more experience with proxy fights and standing relationships with legal firms, PR, and other professional service providers.

Proxy fights can cause smaller companies to post losses

Even though the absolute cost goes down, small and medium-caps have to consider the possibility that spending a few million on a proxy fight will push them from black to red (to say nothing of micro-caps). Activist Insight gives the example ValueVision Media Inc (NASDAQ:VVTV) which spent $5.3 million unsuccessfully trying to fend of Clinton Group, which spent $800,000 to pick up four board seats and contributed to ValueVision’s losses for the quarter.

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