RESEARCH REPORT
Steering through activist investor demands
5-MINUTE READ
September 30, 2024
In brief
- Activist investors are a persistent concern for CEOs and boards. Nearly a third of large public companies face a 60%+ probability of being targeted.
- While activist campaigns boost shareholder returns initially, they can derail a company's strategy and compromise long-term value.
- The power to keep activists at bay lies with leadership. It calls for a shift from reactive defense to proactive value creation.
The rising tide of investor activism
Financially oriented investor activism is surging, with campaigns up 111% over the past decade. What started with a handful of bold, contrarian investors has grown into an established industry and a force to be reckoned with.
Activist demands can range from better corporate governance and dramatic improvements in operating margins to divestiture of non-core, underperforming divisions. While these changes may seem beneficial, sudden and unexpected demands can disrupt the company’s long-term strategy and divert leadership from its value creation priorities. How can companies achieve profitable growth amid these short-term pressures?
4 in 10
companies in the S&P 500 have been targeted by an activist at least once since 2010.
69%
of the time, at least one of the activist’s demands is met—through settlement or a proxy fight.
8.9%
increase in TSR one year after announcement but returns decline each year thereafter.
51%
of campaigns calling for a CEO change achieve that result within a year.
Everybody thinks it's not going to happen to them until it does, and then it's too late.
Chief Strategy Officer, leading financial services firm
What puts you on an activist’s radar?
Poor financial results signal to an activist investor that a company may be undervalued, mismanaged or facing deeper issues, making it an attractive investment opportunity. More than three out of four target companies (79%) turn in subpar numbers in the two years leading up to an activist campaign.
There are also other, more subtle signs that can make a company a likely target. Factors like CEO tenure, ease of operational change and media presence and scrutiny can all signal a company's risk of attracting activist investors.
Activists’ demands and outcomes
Activist investors aim to increase the target company’s total shareholder return (TSR) through an array of actions and recommendations.
More than two-thirds of campaigns focus on changes to corporate governance and top management. We view these as a means to an end, a way for activists to influence the target company’s decisions.
After governance changes, M&A moves—such as demanding a spin-off or pressuring for a sale—are the next most common, followed by strategic changes, operational efficiencies and capital management.
Corporate governance, M&A and strategic changes are activists’ primary focus areas
Not all activist campaigns result in an outright win for activists, though. Just under half of campaigns (47%) end in a mutually agreeable settlement, with the activist and the target company finding common ground. A third of campaigns culminate in a proxy fight, while the remaining 20% of campaigns are unresolved, withdrawn or otherwise inconclusive.
While activist campaigns on average boost initial shareholder returns, these gains are short-lived with TSR falling off in subsequent years.
Following a campaign, average TSR shoots but underperforms the S&P 500 in the long run
Recommendations for CEOs and boards
Investor activism shows no signs of letting up, while the efficacy of their strategies, tactics and approaches continues to improve. Even the largest, most storied companies are now targets. What should CEOs and boards of directors do given the current environment?
We recommend a balanced approach of proactive strategies and robust preparation, consisting of four steps:
Closely monitor activist activity in your industry, develop a custom threshold-based risk scorecard and utilize “red teams” to diagnose critical vulnerabilities.
Take proactive measures to reduce your risk, such as pursuing an ambitious, top-quartile performance strategy and communicating—with proof points—the shift in direction to investors.
Use multi-source early warning systems, engage a broad set of advisors and execution partners and use AI-based simulations to ensure vigorous discussion and alignment among the board and management.
Focus the dialogue on a narrow set of changes that drive near-term value without compromising long-term shareholder returns. Respond using a superior understanding of the business and its value drivers and the support of aligned shareholders. Where possible, use the activist’s presence to accelerate in-flight plans.
From vulnerability to value
A potential activist campaign can serve as a catalyst, pushing CEOs and boards to build a stronger, more resilient business.
The power to keep activists at bay often lies with leadership—and calls for a shift from reactive defense to proactive value creation. The goal is to turn challenges into opportunities, transforming scrutiny into a driving force for value and treating activist pressures as a springboard for enduring success.
My strongest advice to people in dealing with activism is to be your own activist.
CEO who successfully navigated an activist campaign
