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E-MailPaul Tiger and Sebastian Fain are partners and Elizabeth K. Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Tiger, Mr. Fain, Ms. Bieber, and Ethan Klingsberg. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); and Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).
Although the level of publicly reported activism has decreased this past year, boards and management teams continue to be occupied by a regular flow of “private” activism—i.e., aggressive non-public, inbound communications calling for changes in strategic direction, operational focus, public commitments to long-term metrics and changes to board and management composition, all made without launching a public campaign.
Meanwhile, we are witnessing the business model of activism evolve. Activists increasingly work with private equity funds or adopt a private equity model themselves that can be deployed in parallel with an activist campaign (e.g., as a provider of PIPEs to finance operational changes or as members or leaders of consortia to acquire all or a portion of the targeted company). At the same time, we are also seeing convergence in the other direction as traditional private equity sponsors accumulate non-passive, minority positions in publicly traded companies.
The adoption of these models is consistent with the increased focus of activism on optimizing M&A activity (wholeco sales, accretive acquisitions, multiple-improving divestitures and alternatives to M&A transactions endorsed by the incumbent board), alongside advocacy relating more generally to capital allocation choices.
This M&A focus will dovetail with the upcoming recovery era and the dispersion of valuations and prospects among companies that will characterize this era. Activists will push the losers of the recovery era at one end of the spectrum to sell or retool via M&A. Winners will be urged to serve as consolidators.
Activists will also be paying close attention to the few dozen companies that adopted short-term poison pills prophylactically in the spring of 2020 as these pills start to expire in 2021 (or are renewed and thereby invite recommendations against support of the incumbent board from proxy advisory firms).
We are now working more regularly preparing and defending unintuitive targets—e.g., companies in highly regulated markets, large caps and controlled companies—but these targets are not random. Activists continue to focus on opportunities that fit their established criteria, including underperformance relative to peers and perceptions of market undervaluation and the underutilization or misallocation of capital.
The continued consolidation going on in the actively managed fund sector will result in further concentration of ownership in stockholder profiles and increased vulnerability to an efficiently run activist campaign—in the same way we have seen with the significant growth in passively managed funds. Actively managed funds, passive strategy funds, and other institutional investors are also increasingly willing to make demands themselves, privately and publicly, that evoke tactics from the traditional activist toolkit and to pile on to campaigns led by traditional activists. This is especially true of ESG issues, where activists continue to be acutely aware of ESG weaknesses at their targets and to build bridges with institutional shareholders focused on elements of ESG or even to make ESG a focus of their campaigns.
As a result, and given the continued convergence of interests among different stakeholders in the public company ecosystem, boards and management teams will need to proactively incorporate substantive responses to potential activist concerns in their stakeholder engagement in order to stay out in front of such issues and keep activists at bay.
