Forming active defence against activist investors

With activist investors growing in prominence, how can finance help companies protect themselves?
Forming active defence against activist investors

As activist investors build their presence on the global market, finance professionals need to bolster their preparation for potential activist campaigns.

Worldwide over the last five years, the number of companies targeted by activist campaigns has been increasing by 8% a year, while assets under management of activist investors has been growing at 9% annually, according to global consultancy firm McKinsey. Activists’ interests involve mergers-and-acquisitions activity, divestments, and corporate break-ups.

“Some activist investors are looking to take positions with a view to litigation, and where they can exploit situations to their advantage,” said Paulius Kuncinas, a Brussels-based economist and adviser at Covalis Capital. “They identify gaps or issues and go after them. It can be a very hostile strategy.”

The economic crisis brought about by the global COVID-19 pandemic has cooled activist activity temporarily, but it seems likely that the crisis will catalyse more activist investment rather than less in the medium term, as companies become hungrier for new capital, and lower valuations make businesses more attractive for investors.

Activist investors are clearly here to stay, so how can CFOs and other financial professionals deal with them? FM magazine spoke to several experts to find out.

Attract high-quality investors

The most obvious way for financial professionals to avoid problems with activist investors is to try to ensure that their companies are not targeted in the first place.

“Ideally, you want to avoid them building a significant position,” Kuncinas said. “There’s often not a lot you can do once a hostile investor gets in.”

According to Kuncinas, companies should look to attract long-only investors that are looking to buy and hold stocks — for example, pension funds and insurance companies, particularly from rising markets in Asia. CFOs can do this both by building relationships with such investors and by ensuring that their businesses are run in a manner that would attract them.

“You need to find more favourable investment funds that are nonspeculative and build relationships, and get rid of short-term investors,” he said. “Paying good dividends is important, as it’s what these quality investors are seeking.” Such investors have become increasingly stringent in ensuring that their potential investments meet ESG requirements.

Many activist investors are looking for atypical circumstances that have the potential to shift a company’s value, beyond its underlying fundamentals. “Normal companies are usually of no interest,” Kuncinas said.

Be your own activist

Running a tight corporate ship is an essential defence strategy, according to Philip Walters, managing director and leader of the industrials team at global strategic communications company Finsbury. He argues that “companies must be their own activist”, to close the gaps that activist investors target.

“This means proactively addressing vulnerabilities by looking in the mirror [and] asking, ‘Are we effectively communicating our strategy and value-creation story? Is the right strategy in place for long-term growth? Is this transaction defendable on rationale and valuation? Are there gaps in the ESG [environmental, social, and governance] story?’ No company, no matter what size or what continent, can afford to be complacent,” he said.

This requires investment — for example, in staff and in ensuring ESG compliance — but it can protect a company from a hostile takeover.

Engage stakeholders

It is essential to engage all stakeholders, including those likely to be opposed to activist campaigns and those who might ally with an activist in certain cases.

“One truism of an attack is that activists can’t win on their own; they need to build a consensus to effect change and unlock value,” Walters said. “Shareholders — be they traditional asset managers, index funds, retail investors, or employees — can have varying and evolving motivations, and an activist’s platform needs to appeal to all of them.”

This process involves extensive preparation, to ensure that companies can defend against activist campaigns. This is particularly important in public and investor relations, and in keeping a keen eye on how key stakeholders view the company. Ensuring that long-term investors are kept engaged is essential.

“This means developing defence narratives and materials, rehearsing responses in simulations, and dialling-up stakeholder outreach,” Walters said. “It also means being transparent about the board’s decision-making — explaining why the company is not taking certain actions can help rebut activist attack points. Companies must maintain constant control of their narrative and have storytelling channels ready — from shareholder letters to paid social media campaigns — with supporters identified in advance. [Public relations and investor relations] must work hand-in-hand and help the company stay attuned to sentiment.”

Riley Adams, CPA, a California-based senior financial analyst at Google, agrees that engagement and preparation should be the watchwords. “Preparing in advance can have senior management knowledgeable about processes and place more emphasis on making decisions, as opposed to wondering and worrying about roles and responsibilities,” he said.

Bring in expert advice and monitor developments

Adams previously worked in the investor relations department of a Fortune 500 company, where he organised an action plan to ensure that it was prepared to defend against an activist investor should one take a significant ownership stake. This involved ensuring that company employees were aware of their roles and responsibilities, and drawing up internal processes for coordinating information between various work teams and senior management.

However, it also entailed identifying external communications companies and law firms to hire — a cost centre for the finance department to control. To head off the risk of being caught off-guard by an activist campaign, Adams also hired a qualified financial services provider that had worked for a range of other companies, to track capital markets developments for potential activist activities.

“Such examples include significant equity trading activity over an extended timeline, tracking volume from known brokers who handle trading activity for activist investors, examining options activities, noting differences in trading activity for our preferred stock and bond issuances, and other capital markets involvement,” Adams said.

Embrace positive activists

Not all activist investors should be seen as adversarial. Some, rather than seeking to exploit atypical situations, are investing to promote more ethical and — in particular — more environmentally friendly business practices at the company. In this case, accepting, embracing, and engaging may be the sensible approach.

“Embrace the existence of activist shareholders because they will put pressure on CFOs to justify the investment and financing decisions they make,” said Jordi Fabregat, director of ESADE Business School’s executive master in finance programme in Spain. “Accept that these shareholders will prevent directors who only own a few shares from comfortably dominating publicly traded companies.”

Andrew MacDowall is a freelance writer and risk consultant based in France. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at