When a company first becomes aware that an activist investor is purchasing their stock, the first reaction on the part of the company is often to be very defensive and prepare for battle.
As you would expect from me, my first reaction is to approach the situation very differently – that is, with a balanced perspective.
Let’s first start with some background. What is shareholder activism? In an excellent article from the Boston University Law Review, “Reasonable Investor(s),” Tom Lin of Temple University explains that shareholder activism is a form of activism in which shareholders use equity stakes in a corporation to put pressure on management to achieve a higher stock price.
Okay, so stop and think about the goal of an activist investor. They have capital to invest and are focused on generating a return for their investors. Hmmmm, sounds pretty similar to the goal of company management, the board, and the company shareholders. 🤔
I make this point because it is possible (at least in a certain percentage of the time) that the goal of the activist shareholders is completely consistent with the goals of the company. Therefore, rather than getting into a completely defensive mode, I think it is appropriate for company management to meet with the activist investors and take the time to understand why the activist investors believe the stock is undervalued. I think it is possible that the activist investors may come up with recommendations that make sense for management to implement.
If Management does not believe the activist investor recommendations are appropriate or implementable, why not take the time to convince them why you disagree with their recommendations?
Most investors don’t want you to implement actions that are not consistent with increasing the stock price.
Okay, here’s the other side of balance. Clearly, there are some activist investors (I will not name them🤫) who are very short term oriented, focused on a quick return, and have zero interest in the future of the company beyond the next few months. In that case, you clearly need to get into a strong defensive position with outside advisors and convince your shareholders why you are not implementing the recommendations of the activist shareholders.
As always, take the time to listen, demonstrate that you “seek to understand before you are understood,” and clearly explain why you agree or disagree. I do believe there are times when activist shareholders can play a positive role in a free market capitalist system.
Very interesting. I think there are a number of considerations. Does the target company have a good understanding of what may be contributing to the difference between intrinsic value and the stock price – on a perpetual basis, i.e. doing this all the time in the normal course of running the company. Does the activist have the wherewithal to carry this off (has accumulated 5% and filed a 13D) and should be taken seriously? Is there a strategy for dealing with activists who are playing around (like the AMC guys a couple of years ago)