Activism in M&A: Preparing for Change

Managing Activism in M&A

As activist engagement in M&A continues to rise, boards must be prepared. Whether it’s a special meeting request, a proxy contest, or a poison pill, activists are often determined to change the course of a company’s business.

Activists typically target companies they believe are underperforming relative to their peers or that have excess cash or monetizable assets. However, every activist has its own agenda.

Deal activism

While M&A theses continue to catalyze activist campaigns, lingering concerns over global economic growth and continuing volatility from the pandemic have prompted activists to pivot their focus to other strategic and operational theses. This shift has resulted in an increasing number of demands related to divestitures and spin-offs, as well as broader governance initiatives.

Activists also often attempt to use their influence to spur a company into entering or abandoning a transaction, which is known as “bumpitrage.” This approach can result in increased transaction costs for both companies, including management distraction and the cost of proxy solicitation fees, litigation expenses in response to strike suits and premium payments to holdout investors.

As such, it’s essential for companies to prepare for activist-driven M&A activity by addressing vulnerabilities, articulating the basis for value and proactively communicating with investors and analysts. They should also consider whether there are reasonable disclosures, commitments and/or business actions that could be made or accelerated to preempt a campaign by an activist investor.

Breakup activism

While activist campaigns started this year with a roar, the first quarter saw the number of campaigns drop as investors were sidelined by market concerns. However, the number of activist campaigns globally still hit a record high, and investors outside the U.S. accounted for more than half of the total, reflecting a shift in activism strategies.

Ulmer: Activists are becoming more sophisticated and are using tactics that resonate with other shareholders, including environmental issues. They also are more likely to prioritize private engagement with management. They are looking to settle their demands through negotiated agreements instead of public proxy fights.

Activists are seeking to improve the company’s operational performance and strategic plan. They also are lobbying for capital allocation adjustments that could put cash in the hands of shareholders, such as stock repurchases and dividends. Some activists are pursuing breakups of large, cash-rich companies. For example, Elliott has been pushing for the split of Bayer into an agricultural and pharmaceutical group.

Industry competitor activism

The risk of activist attacks is a powerful motivator for firms to adopt policies that align with consumer values. For example, when a company takes an activist stance on the issue of climate change, it will probably increase its sales by attracting environmentally conscious shoppers. This will also help it build brand loyalty by creating a sense of authenticity and trust with consumers.

Managers, however, are constrained by market forces and a fiduciary responsibility to shareholders. They must offer a compelling business case for spending their firm’s resources on political activism.

To examine this question, the authors analyzed the count of peer activists tweets on a specific sociopolitical issue by industry competitors during a three-day window. They find that the impact of peers’ activism is most influential when it occurs within 24 h before a focal brand’s own activist actions, but this effect diminishes rapidly after 25-72 h. In contrast, the effects of activist tweets by non-industry competitors decline more slowly and are only marginally significant for the three issues examined in this study.

Hostile takeover activism

The process of attempting to gain control of a public company by buying out a majority of its shares is known as hostile takeover activism. Hostile takeover activism may involve tender offers, proxy fights, and other tactics. These activities can be expensive, disruptive, and distracting. Companies should be prepared for activist attacks and consider ways to mitigate them.

Activists target energy companies, particularly those with large energy assets and business segments. They seek to unlock value from those assets by advocating for a sale or spinoff, as well as by pushing for the transition to renewable energy.

A company’s vulnerability to activism depends on its discount to intrinsic value, sustained underperformance captured by total shareholder return decline, and detractive structures that attract the attention of activists. Boards should assess their vulnerabilities on a regular basis, and communicate those assessments to shareholders. This will help them prevent activist campaigns from derailing their long-term growth strategies. This is a crucial part of the fiduciary duty of directors.

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