What do you do when activist shareholders are standing outside the gates of your company rattling their sabres?
Elliott Management, Cat Rock Capital Management, Jana, The Children’s Investment Fund. Many a company director wakes up bathed in a cold sweat, reliving confrontations with these kinds of activist shareholders. The common denominator is almost always that both the companies and their directors were completely surprised by the harsh tone of the shareholder and, as often as not, the personal attacks on the company CEO or supervisory board chairman. What can you do to protect yourself against these attackers and when do the preparations actually start?
For management, being prepared means thinking well in advance about a possible activist at the gate. The threat is real and increasing. Activist shareholders made their voices heard a record number of times in 2018, with 266 separate instances recorded. A quarter of those were in Europe, according to research by investment bank Lazard. For many company directors the bogeyman haunting their dreams was, and still is, Paul Singer of Elliott Management, who on 22 occasions publicly demanded actions from companies last year.
The battle between Elliott and AkzoNobel, which played out in the public domain in 2018, was an epic battle. Chairman Antony Burgmans fought like a lion and, by way of the Dutch Enterprise Chamber, managed to stop Elliott in his tracks. It seemed a great victory. But in some ways, it was a Pyrrhic victory. In order to keep Elliott away from the rest of the crown jewels, the company’s chemicals business was be sold off.
What could AkzoNobel and other companies in the same situation have done differently? And what lessons can be learned from the strategy of and the actions carried out by the activist shareholders?
Well, perhaps the biggest mistake companies and their executive boards make is to underestimate the activist shareholder. This – to say the least — is not at all useful. Because one thing is certain; when shareholders like these are moved to take action, they have planned everything to the very last detail. For most of them, it’s their bread and butter. This means that companies and management must engage with them earnestly, knowing what the stakes are and what must be done not to lose control of the situation.
The activists themselves will have prepared well for the attack and for all the scenarios they can imagine to counter the first negative reactions from a company and its management. Do not underestimate the ability of the activist shareholder to find the Achilles heel of your company. Before you know it, you’re in a scenario where the activist shareholder has the company cornered. And when you’ve reached that point, it’s no easy task to turn the tides in your favor.
Good preparation to defend the company from activist shareholders means taking is a long hard look at the business. What’s your strategy? What results is it bringing? And is it sustainable in this rapidly changing world? Support for the strategy from (major) shareholders is crucial, as well as from other important stakeholders, such as employees, customers and key opinion leaders.
Like a forensic investigator, you need to look critically at the company’s weaknesses. A lagging share price is often the first clear signal of danger ahead. But at the end of the day, it’s all about the root causes that behind poor stock market performance. Think of issues such as high operating costs and the lack of determination to reduce them, failed investments, slower growth, and recent problems in governance. Let’s shouldn’t forget the classic war cry of the activist shareholder – a “lack of synergy” between the company’s component parts.
With ruthless precision, activist shareholders know how to find these weaknesses and to use them in publicity. These battles continually rage in the media. Management who cross swords unprepared with an activist shareholder usually find themselves falling victim to a well-oiled war machine. In such a situation it is difficult to communicate your own arguments credibly and all but impossible to influence public opinion once it has already been formed.
The key lesson that history teaches is make your friends before you need them. Engage with stakeholders well before the war drums are beating and ensure they are willing to stand by your side. The reality is that it’s difficult to operate in a critical – or even hostile – world without the support your company’s stakeholders have to offer. Making time for thorough preparation and efforts to build support both internally and externally can give your company the metal to weather any storm. This is the good news; it is indeed possible find the means to ward off activist shareholders, provided that you have indeed taken the time to prepare.
Start now. It’s already too late once someone is pounding on the gates.