It’s no secret that activist shareholders are have entered the mainstream and that they are willing to take on the largest companies in America if they see weak performance, conflicts of interest, or too much cash sitting around. In the past, most management teams reflexively saw activist campaigns as hostile attacks and sought to prevent them from succeeding, but research from the last few years shows that these campaigns have a strong record of unlocking value, and that the best outcomes are when management engages with activist shareholders to find a reasonable compromise.
Collaborative outcomes are best for everyone, but still the exception
“Our analysis of 400 activist campaigns (out of 1,400 launched against US companies over the past decade) finds that, among large companies for which data are available, the median activist campaign reverses a downward trajectory in target-company performance and generates excess shareholder returns,” write Joseph Cyriac, Ruth De Backer, and Justin Sanders for McKinsey & Company.
The results are most pronounced for companies when management and the activist can reach a settlement and when the company has more than $1 billion in annual revenue. The McKinsey report doesn’t explain why large companies have such better results, but it seems clear that when activists and management work together they can take the best ideas from both sides and avoid wasting time and money in proxy fights, takeover attempts, and the like.
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Management teams are already coming around to this idea, which is why roughly three-quarters of activist campaigns start off collaboratively, but 60% still turn hostile before they are resolved. To prevent that from happening, Cyriac, De Backer, and Sanders recommend that management have protocols in place to deal with activist demands if they should ever come up.
Three steps to dealing with activist shareholders
The first step is to have a response team that can give serious proposals the attention they deserve and present options to management. This has the double advantage that the team will be able to delve into the details of the activist proposal and it avoids emotional responses that can create a hostile situation when it isn’t really necessary.
Second, the team needs to understand both the nature of the activist’s proposal and the activist himself, including the tactics and outcomes of previous campaigns. Some are more willing to turn hostile than others, and many have developed favorite tactics from years of experience.
Finally, management should engage with major shareholders as soon as the campaign begins, because activists are almost certainly doing so.