CM December 2020

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OPINION AUTHOR – Adam Bernstein For Caulfield, aside from the increasingly global nature and appearance of local activists outside the US, there is a divergence of methods used by the more hard-nosed ‘pure’ activist investors “…who will rapidly escalate disputes and take disagreements into the public domain, versus the ‘constructionists’ who take a (slightly) more medium term view and look to work with management more collaboratively, at least for a period of time.” COVID-19 has dented global economies and livelihoods. But it has also altered the activist investor landscape too. Caulfield says: “It has put a massive shock through the markets and created a level of volatility in the fundamentals as well as companies’ share prices. This, combined with activist investors trying to gauge the impact on existing investments, capped the levels of activity.” Activism is not going away any time soon. Whether it’s an attack from an activist investor, or pressure from the media or a consumer group, firms need to comprehend the concept that they aren’t in ivory towers living in splendid isolation. But he warns that the outlook is stabilising: “We are seeing companies beginning to emerge, and indeed, the performance of management during and after the pandemic will provide rich hunting grounds for activist investors seeking to put them on the spot.” Investors, no matter their size or level of professionalism, by definition seek the best possible return. And activist investors are no different. Caulfield has seen their war-chests grow as underlying investors seek alternative asset classes such as these. He says that “… they are needing to find new targets. They’re also utilising a wider range of techniques, and indeed are showing signs of overlapping with another kind of activist investor – private equity.” But just as global events and the markets can impact activist investor activity, so too can Government policy. Put simply, Caulfield knows that Governments can legislate to bias shareholder influence to push longer-term objectives at the expense of new shareowners, can widen definitions of ‘strategic’ sectors and can limit the ability for M&A in those sectors. Governments can have a very real impact on activist investors. So, with the scene set, how can a firm prepare itself for the onslaught of activist investor? Caulfield is of the view that companies can fight back. But depending on whether they are merely apprehensive or are actually in the throes of a campaign will influence what they can and should be doing and the timescales for action. FIXING THE ROOF First off, he says that businesses that have time to ‘fix the roof’ should be challenging the business to ensure it has the right value creation plan, assets and balance sheet. He says that this may just provide confidence – that can be fed to markets – that the business is on the right track. However, this activity might also provide the trigger for a change without the disruption of an activist investor. “But,” he warns, “be aware of your risks – the features of your company, its performance, management and board that may attract them.” He believes that this can also help to ensure that action is taken to plug the holes while fundamental improvements can take place. But if an investor’s campaign is imminent or underway, then Caulfield advises targets to focus on tactics. There is unfortunately no ‘one-size fits-all’ approach and so the defence will depend on the strength of the executive and the company’s performance on their watch and the nature of the activist. That said, he does suggest engaging with activist investors as some have genuine ideas worth consider while others will be a drag on management time, focus and resources. Caulfield concludes: “Ensuring that the strategy, communication and preparedness amongst the executive and board are clear, as well as having insight into the particular activist, are some of the basic things to prepare.” Activism is not going away any time soon. Whether it’s an attack from an activist investor, or pressure from the media or a consumer group, firms need to comprehend the concept that they aren’t in ivory towers living in splendid isolation. A mixed metaphor but the point is made. Adam Bernstein is a freelance business writer. We are seeing companies beginning to emerge, and indeed, the performance of management during and after the pandemic will provide rich hunting grounds for activist investors seeking to put them on the spot. Advancing the credit profession / www.cicm.com / December 2020 / PAGE 14
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CM December 2020

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