As if boards didn’t have enough to do managing their companies in the midst of global pandemic, now they must contend with warnings of increased attention from activist investors.
Attention has gradually shifted to activism as the economic and business fall-out from lockdowns across Europe and North America has become clear. A warning on the Harvard Law School corporate governance blog, posted over the Easter weekend, warned that “companies that have had their valuations recently upended should assume that they may be targeted by an activist investor, either alone or in concert with others, and take steps to prepare accordingly”.
The article, from a group of lawyers, couldn’t be more stark, though the authors concede the full consequences of Covid-19 on activism remains “largely uncertain”.
And lawyers warning of dire consequences if boards fail to prepare is, perhaps, predictable, given that they offer legal services for just such an event.
However, stock markets have lost considerable value since the pandemic took hold across the world. The FTSE 100 is down 25% (as of 14 April) on its post-Christmas high on 17 January. Two weeks ago it was 35% down. The Dow Industrial Average plummeted almost 30% from 12 February to 23 March, though it has rallied since.
Opportunities for activists
With stock prices down, many companies may look vulnerable. There is much talk of a coming spike in M&A activity, but activists may also be queuing to take advantage. Goldman Sachs has reportedly already warned clients about the risk.
The initial reaction from many activists was to suspend or end actions they were underway as lockdowns were announced. Carl Icahn had been trying to oust the entire board of Occidental Petroleum but settled for two board seats instead.
However, lawyers at Morgan, Lewis and Bockius spelled out a number of reasons why activists may seize opportunities as a result of Covid-19. Firstly, stocks are trading well below their annual high points. This may prompt activists to raise capital in the hope of taking advantage. Current low valuations may lead activists to target more large cap companies than they normally would.
Then there is distraction. With so many boards focused on corporate survival, a good proportion may be unprepared for an activist intervention. In addition, weaknesses revealed by the impact of the pandemic may offer activists convincing arguments for why intervention is required.
However, the lawyers also work through reasons why activism could remain quiet. This includes the possibility that access to capital may be limited for activists while institutional investors may withold support as they rally round boards. Activists might also find it harder to detail a credible plan for enhancing value in a post-pandemic world.
That all being said, many in the finance world expect activists in the US, at least, to get active soon. When Boston Consulting Group surveyed investment managers last week 66% of respondents said they expect investor activism to increase and companies should prepare defences.
According to Josh Black, editor-in-chief of Activist Insight, a specialist magazine for the sector, shareholder activism has seen a decline since the crisis took hold, with no change expected until the impact of the virus has stabilised. However, activity may pick up once lockdowns begin to end. This would set up activists for clashes next proxy season. This is most likely in the US, though activism has held steady in Japan. The UK and Europe are harder to predict, said Black, because there are fewer well-capitalised players in the region. But some companies will be vulnerable.
“Companies that are slower to recover will be vulnerable to operational/leadership-focused campaigns,” said Black.
“Weaker balance sheets may lead to consolidation in some industries—activists could agitate for, or against, such deals, depending on the circumstances.
“Those companies that were reckless with governance during the crisis—implementing poison pills or taking other actions that were not friendly to shareholders without thorough explanation to the market—could also be viewed suspiciously by activists,” he added.
Activism may be on hold for the time being, but expectations are it won’t hold off for long. Boards would do well to prepare.