Activists are prepared for battle. They are armed with innovative business plans containing a mixture of investment banking style analysis, strategy consulting and financial restructuring business plans that are comparable to the top consulting and “bulge bracket” investment banking firms. Activists also maintain a massive cash war chest climbing into the tens of billions along with a who’s who database of institutional investors that are more than happy to lend their proxy vote to assist activists in unlocking shareholder value.
Mounting a defense to fight off an activist can be extremely expensive in both time and cost. A defense strategy can quickly run into the millions because it requires the hiring of investment bankers, accountants, attorneys and public relations gurus. Collateral damage from a public fight not only is costly, but also exposes the firm’s weakness to competitors, shareholders, customers and business partners.
Here are 3 things a CEO can do to avoid or preempt an activist attack.
1. Eliminate financial and operational underperformance. Activists are attracted to firms that demonstrate fundamental underperformance when compared to industry peers. These include firms experiencing growing negative margin gaps, sluggish revenue and increasing sales but at a decreasing rate. Additionally, other key performance indicators include poor returns on assets, equity and employee performance, as well as those that have sub-optimal real estate assets. Starboard is currently after Macy’s to spin off its real estate. Tech savvy activists are increasingly launching attacks on companies that maintain outdated technology and marketing capabilities and are ill equipped to compete in today’s hyper competitive digital eCosystem. A company experiencing financial and/or operational underperformance versus its peers is more than likely already on an activist watch list.
2. Conduct a regular vulnerability audit. Avoid the cross hairs of an activist by not being undervalued and underperforming. A preemptive activist audit is essential to gauging your firm’s vulnerability to an activist investor. The audit will provide management with a deep understanding of the value-creating proposals that an activist is likely to present. Create an internal value-creating turnaround plan when no one is watching and without the cost and distraction of an activist campaign. A strategic communication plan exposed to the investment community will erode the attractiveness, thus reducing the activist viability of a large payout. In the event that an activist campaign is launched, management will then have a plan that can lead to a fast track of compromise and collaboration.
Ask the following questions:
- How well do EPS, net income and P/E growth rates over the past 18 months compare to peers
- How well does your debt to equity and capital structure compare to peers
- How much cash will return to net income if the financial structure is optimized
- How efficient is your sales and marketing operations when compared to key competitors
- How effective is the current governance strategy
- Does the board have deep expertise in technology (cloud, social-local-mobile, CRM, big data, analytics)
- How efficient is human capital when compared to peers
- How efficient is revenue, margins and equity contributing to the business
- Where is the firm experiencing operational performance/underperformance
- How efficient is your technology environment
- Is the current technology environment capable of competing in tomorrow’s digital world
- Does your firm operate more like Google or Barnes & Nobles
- How efficient is inventory and cash management
- Is your firm’s real estate portfolio optimized to contribute maximum returns to shareholders
- How well does your firm invite customers to co-design products and create new services
3. Create an aggressive turnaround plan and communicate your strategy to stakeholders.
Prepare a shareholder outreach strategy. Highlight weaknesses, while providing a clear roadmap designed to mitigate underperformance and aggressively unlock shareholder value. The plan should include any new members or advisors to the management team, as well as plans for reducing cost, improving profitability and/or spinning off unproductive operations. A well-designed value creation plan will help ward off potential activists.
Having an activist prevention strategy provides management with an activist’s perspective regarding creating shareholder value. Executing a review gives management the ability to reverse poor performance on their terms, as well as avoid a potential conflict with a heavy-handed activist.