There are many benefits to becoming a public company; however, the additional publicity does not come without risks. Suddenly, investors have access to buy and sell shares of your company on a day-to-day basis, and the control over the top owners of your company diminishes. The substantial amount of capital investors put into your business comes with expectations. Any public company, whether new to the market or further along in its lifecycle, needs to be educated on the threat of activist investors.
History and Top Players
Dear Chairman by Jeff Gramm pins the birth of the activist investor to Benjamin Graham in 1926. Graham wrote a letter to Northern Pipeline requesting the company sell railroad bonds and other securities and distribute the profits to shareholders in the form of a dividend. When his request was denied, Graham solicited votes from his fellow investors over the next year, and in the end the dividend was paid.
Activist investing grew in the 1980s with the rise of “corporate raiders,” who frequently sought company breakups by taking large positions and engaging in proxy fights for control of the board. New activist funds entered the market in the 1990s and used different tactics. Activists more frequently looked for minority board representation to influence corporate strategy, rather than total company takeovers.
In the 21st century, the number of activist hedge funds grew dramatically, and their goals broadened as well. While the 1980s “corporate raiders” such as Carl Icahn and Nelson Peltz remain top players, a wider swath of activist investors exist in today’s market. Hundreds of hedge funds employ some sort of activist strategy, and traditional institutional investors have become more frequent critics in recent years, engaging in activism as well.
According to Lazard’s 2020 Review of Shareholder Activism, Elliott Management was the most prolific activist during 2020, with involvement in 16 campaigns. This was followed by Starboard Value, with 6 campaigns, and Oasis Management, with 5 campaigns. During 2020, Bluebell Capital Partners, Polygon Global Partners, ValueAct, and Land & Buildings Investment Management each launched 4 activist campaigns, while Third Point, Trian Partner, and Sachem Head Capital partook in 3 activist campaigns apiece.
A popular resource for activist characterization is the SharkWatch 50, a compilation of the 50 most significant activist investors as chosen by FactSet. Inclusion in the group is based upon several factors, including the number of publicly disclosed activist campaigns waged (with an emphasis on recent activity), as well as the ability to affect change at targeted companies.
Activism in Healthcare
A recent Reuters article pointed out that pharmaceutical companies are increasingly finding themselves under activist threat. The Lazard data showed the number of activist campaigns in pharma and healthcare increased from 15 in 2015 to 28 in 2019. Elliott recently pushed for a sale at Alexion Pharmaceutical, which shook up the Alkermes board. Starboard Value, Casdin Capital, and Davidson Kempner also launched campaigns in the space last year.
The article highlighted that “Wasteful spending may be the sector’s biggest vulnerability…that creates opportunities for activists to demand cost cuts, or elect board members with the expertise to properly assess new investments.”
It went on to say, “The medical technology sector could be next. Koninklijke Philips, whose business spans electric toothbrushes and hospital kit such as mammogram machines, could be a breakup target. Dialysis kit maker Fresenius has seen its share price nearly halve in the past four years. Recent successes will encourage activists to hunt for their next healthcare target.”
Activist Goals and Tactics
Why might an activist get involved in your stock? There are several, and ever-changing, reasons an activist investor may target your company, but ultimately the investor is looking to make changes within the company. Common areas of focus for activists include M&A, capital return, and strategic or operational change, including board and/or management replacements.
More and more, there is an intersection between activism and environmental, social, and governance issues, as investors not only look for where they can boost shareholder returns, but also where they can sway societal change.
Activist investors may take a position in a company’s stock over the course of a year, or over the matter of a couple days. The activist may buy via traditional equity, but also could gain exposure to your stock using derivatives such as swaps and options to be more discreet.
Often, when an activists’ ownership reaches 5% of shares outstanding, an SEC filing requirement of Form 13-D is required. This signifies to the company, shareholders, and regulators that there is an “activist” owner with at least 5% ownership looking to make change at the company. At over 5% of shares outstanding, a “passive” investor is required to file a Form 13-G 45 days after the year end, while the requirement for an “active” investor is to file a Form 13-D within 10 days of crossing above 5% ownership.
The information in the 13-D filing will include who the investor is, how much they own, and the purpose of the transaction (in Item 4). Among the most noteworthy items in the 13-D filing is the purpose of the transaction, which allows other investors some insight into what the new “owner” is thinking.
Tactics of the activists will vary by organization and are somewhat unique to specific individual personalities (i.e. Carl Icahn, Paul Singer) and continue to evolve. Some may look to privately negotiate change with the company in an effort to unlock value, while other may be more vocal in their pursuit of change, issuing public letters to management, starting proxy battles, and engaging with the media.
How to be prepared and react
Whether a new or tenured public company, management should be familiar with the risk of shareholder activism.
To be prepared, a management team should know where there are risks in the company’s business units. Proactively monitoring and understanding your company’s ownership, along with consistent shareholder engagement, can help prepare management for a potential activist campaign.
Response plans to activist involvement can be costly and messy; activists often attack individuals. At a high level it is important to consider the activists’ ideas, look for ways to build agreement, and engage key shareholders. Having an open mind and being transparent with all constituents often leads to less confrontational situations.
Here at Gilmartin, we have extensive experience helping our clients communicate with all types of investors. If activism is a current or future concern for your company, please contact our team today.
- The Case for Activist Investors – hbr.org/2016/03/the-case-for-activist-investors
- Who are today’s activists and what do they want? – corpgov.law.harvard.edu/2015/04/07/shareholder-activism-who-what-when-and-how/
- Lazard 2020 Review of Activism – www.lazard.com/media/451536/lazards-2020-review-of-shareholder-activism-vf.pdf
- Activists kick open the doors on pharma laggards – www.breakingviews.com/considered-view/activists-kick-open-lab-doors-at-pharma-laggards/
Erik Abdow, Associate