This year is expected to be another record year for activists. Never mind that the group’s average returns lag behind the S&P 500; the money is still flowing into these funds. In fact, it has tripled in the past five years. Today’s activists have more money to put to work. And they have more opportunities to buy on the cheap, given the volatile, down market, and the more attractive entry point of many companies’ stock prices right now. But, perhaps most importantly, today’s activists are more patient and willing to be in the game longer than their forefathers were. It all adds up to a deadly combination.
Every company needs to be aware of the potential threat.
When activism first emerged in the 80s, the practice was very much about targeting underperforming assets, demanding major change in short order, capitalizing on value, and getting out quickly, payoff in hand.
The new generation of activists—sometimes dubbed the ‘sons of activists’— remain deep value guys at heart. And today’s market is, no doubt, with ripe with opportunities. But it’s critical to keep in mind that this group of activists is a little less aggressive and has longer-term views than their predecessors did. As a result, they are much more willing to cast a wider net when looking for companies in which to buy a stake and force their hand. In other words, they’re not just looking for the low-hanging fruit. And that means that the big and the small, the good and the bad; virtually all companies are on these new activists’ radars. No company is immune to activist attention, and any business could potentially fall under attack.
Defense starts with good offense.
What do you do? Even if your business continues to post healthy returns, that’s not enough to keep you out of the activists’ scopes, especially given the current uncertainty in the market. Is there anything more that can be done to protect your business?
The answer is a resounding, “Yes.” As with so many things, the best defense is a good offense. A solid strategic investor relations plan is critical—one that is vigilant about looking for any weak points in the investor narrative, staying on top of investor sentiment, and maintaining support in the investor base—all the more important in an era of volatility where investor confidence may be hedging a bit. You need a plan that allows you to put and keep your guard up, even before an activist comes sniffing around.
Specifically, a solid IR plan that will help keep activists at bay should include:
1. A crystal-clear assessment of any vulnerabilities—both current and future. Even if your organization is about to post a record year, there are undoubtedly some areas that could use improvement. Consider your organization from an operational, financial, and ESG perspective. Are there any weak spots right now? Or issues that could potentially fester down the road? It’s important to remember that today’s activists are looking for vulnerabilities that they can exploit longer-term. They are willing to pick at a loose thread, so to speak, as opposed to only looking for major holes in the stakeholder narratives. If you’re not making the effort to kick the tires from time to time and stay on top of potential vulnerabilities in your investment story, you can bet that activists will be.
2. Real-time feedback on investor concerns and sentiment. The management team and board may be feeling generally pleased with the state of the organization. But do investors completely agree? Understanding their perceptions and viewpoints, especially related to any current or future vulnerabilities, is critical. Regular perception studies can help you keep a finger on the pulse of investor sentiment. A strategic engagement plan is crucial, too, to keep you in front of current and potential investors and help you gauge their interests and concerns. If there is any discord at all brewing among your investor base, you want to be the first to know. And you need to take it seriously. We’ve witnessed one too many companies fail to note the warning signs that can come from perception work, and ultimately leave the door wide open for activist investors.
3. Messaging that addresses concerns and builds support for your position. Once you understand your vulnerabilities and investor perception around those issues, you can build a detailed messaging platform that specifically addresses concerns while clearly communicating your plans for long-term growth and profitability. Perception and engagement work will let you know if something in your current narrative isn’t resonating the way it should be. And it will allow you to identify any gaps in what you are saying and what investors are hearing. Keep in mind that an investment narrative is always a work in progress. Refining it, keeping it up to date, and layering in new messaging points as the market and investor sentiment evolve are all essential steps in maintaining healthy investor relations.
4. Knowledge of who will stay, and who’s apt to go. The better you understand the support level within your investor base, the more prepared you will be to run a smart defense should an activist enter your fund. Based on perception work and analysis of investor voting patterns, you can get a solid idea of who is with you, who may be willing to side with a potential activist, and who is on the fence. This insight will help you tailor messaging to each audience and better understand where and how to focus your resources and efforts should the need arise.
It’s never too soon to put your activism defense plan in place.
Given the current investment climate and the rise of activism activity, all companies should be considering the potential threat and making a plan for how to best defend their investment theses. At Clermont Partners, we specialize in activism defense and strategic investor relations plans designed to engage investors, build and maintain support, and drive new investment within the stock at any price point. If you’d like some independent perspective on your potential vulnerabilities or how to improve your messaging strategy to maximize valuation, give us a call today.