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E-MailHarvind Raman is a Senior Managing Director and Garrett Muzikowski is a Senior Director at FTI Consulting. This post is based on their FTI Consulting memorandum. 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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).
The technology sector dominated shareholder activism in 2023 and is poised for another year of intense scrutiny from activists in 2024. Understanding the current trends in activism and being prepared for activist criticism is imperative for companies to mitigate the risk of becoming an activist target.
In the prevailing credit-tight environment where M&A activity has been less prevalent, activist investors have spent more time meticulously examining potential targets, identifying weaknesses and advocating for operational enhancements. While M&A will always remain a focus of activists who are seeking immediate and certain returns from their investment, the current environment has and will continue to encourage activists to broaden their focus on near-term value creation opportunities like margin improvements and changes in capital allocation strategy.
Several factors can render a company susceptible to shareholder activism. Prior to 2023, the fundamental metric for tech companies that attracted shareholder activism was frequently top-line performance. For years, growth was the primary objective and the market rewarded companies that continued to invest capital in ambitious growth projects and M&A initiatives. However, with the recent underperformance of tech stocks, activists are intensifying their scrutiny of both past and potential purchases and underlying company operations to drive better return on capital.
There are both proactive and reactive strategies for technology companies to consider in order to mitigate the risks of shareholder activism going into 2024:
Deterring an Activist’s Approach with Proactive Value Creation Opportunities
- Implement proactive measures to reduce costs, streamline operations and prioritize profitable growth over sweeping expansion and a “growth at all costs” mindset.
- Drive top-line acceleration by strategically focusing on maximizing upselling and cross-selling of existing products through targeted analytics, rather than excessive focus on new business and product development.
- Maximize customer retention and safeguard upsell and cross-sell opportunities by shaping the product and R&D roadmap with targeted features and process enhancements, as opposed to significant investments in new strategic initiatives.
- Enforce an ROI-based approach to capital allocation and maximize cash flow to the extent possible.
Mitigating an Activist’s Chance of Success with a Reactive Value Creation Plan
- Develop a detailed reactive value creation plan to underscore commitment to enhancing shareholder value, especially when a sale or strategic M&A is not presently viable.
- Identify opportunities to streamline product offerings and strategically refocus R&D spending towards customer protection, platform/product maintenance and high-return roadmap items.
- Optimize the sales team by consolidating activities and aligning with value-based customer cohorts, transitioning from conventional coverage, segmenting and quota setting to a more agile and high-performing approach.
- Enhance cost efficiency through a comprehensive evaluation of spending areas, adopting a clean sheet approach and fortifying resilience to revenue fluctuations by reducing fixed costs to essential levels.
- Explore avenues to liberate working capital that can be reinvested for growth or utilized to fortify the balance sheet.
Tech companies who successfully implement these strategies and effectively communicate the longer-term merits of these decisions can navigate the evolving landscape of shareholder activism in challenging market conditions. Ultimately, demonstrating steps towards sustaining and enhancing shareholder value will help mitigate the risk of shareholder activism.
